The big banks in the United States are preparing for the deterioration of the economy. The results of the third quarter of the main financial institutions on Wall Street have fallen in the third quarter of the year due to the break in investment banking commissions and the higher provisions, despite the fact that the rise in interest rates is also due another party boosting your income.
The six largest entities in the United States (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) earned 29.42 billion dollars in the third quarter of this year, 23% less than in the same period of 2021. The economic recovery allowed in 2021 to release provisions that had been set aside to cover possible non-payments derived from the pandemic that later did not materialize in such an amount. Compared to the 4,509 million released in the period from July to September 2021, the macroeconomic deterioration and the uncertainties about the evolution of the economy have forced them to allocate 4,139 million new provisions.
In addition, the investment banking business has penalized the results of Wall Street entities. That same economic uncertainty and the fall in the stock markets have slowed down activity in the capital markets and income from investment banking (advice, mergers and acquisitions and commissions for underwriting and placement of fixed and variable income issues, mainly) have collapsed in half.
Against this, retail banking, consumer business and banking for small and medium-sized companies remain strong and the rise in interest rates boosts revenues.
The results of JPMorgan, the largest bank in the United States, reflect all these trends. They have been welcomed by investors for exceeding expectations. The largest bank in the United States achieved a profit of 9,737 million dollars in the third quarter, 17% less than the 11,687 million it achieved in the same period last year, according to the entity in a statement. The difference is entirely due to higher provisions for possible loan defaults. While in the third quarter of 2021 the bank released net provisions amounting to 1,527 million dollars, this year it has had to provide 1,537 million dollars.
JPMorgan, however, increased revenue 10% to $32.716 million. If what you look at is its interest margin (interest collected minus interest paid), the increase was more spectacular, 34%, to a record 17,600 million euros. With the Federal Reserve rate hikes, banks have started charging higher interest on their loans before raising deposit rates, which has boosted that spread. On the other hand, the lower activity of mergers and acquisitions due to economic uncertainty has caused non-interest income to fall sharply. In particular, investment banking revenues have fallen 47% in the quarter, to 1,713 million, according to the breakdown of its results.
Its chief executive, Jamie Dimon, predicted a recession in the United States last week in Washington and saw a soft landing for the economy as unlikely. In the statement with which the entity presented its results, Dimon pointed out that consumers and companies continue to have good financial health, but that the risks accumulate. “Although we hope for the best, we always remain vigilant and prepared for bad scenarios,” he concluded.
Bank of America Detroit office.
Bank of America is the bank that has best resisted so far the deterioration of economic conditions. The benefit of the second largest bank in the United States fell 8% in the third quarter, to 7,082 million, as reported by the company. The rate hikes allowed its interest margin to skyrocket, 24%, to 13,765 million dollars, the highest quarterly figure at least in the last decade. This improvement in income from traditional banking, and the pull in fixed-income intermediation, allowed the entity based in Charlotte (North Carolina) to offset the increase in provisions (provision of 898 million compared to the release of 624 million in the same quarter last year) and the 46% drop in investment banking commissions, from 2,168 to 1,167 million,
“We continued to see strong organic customer growth across all of our businesses, with increased customer activity contributing to revenue growth,” CEO Brian Moynihan said in a statement.
Citi earned 3,479 million dollars in the third quarter, 25% less than the 4,644 million in the same period of 2021, as reported by the bank. Once again, the provisions for the deterioration and the uncertainties that affect the economy were key. It went from releasing provisions of 1,162 million to providing them for an amount of 370 million. Its total income net of interest paid grew by 6%, to 18,508 million, although this was due to the positive impact of the sale of its consumer finance business in the Philippines, compared to the negative impact of the sale of the same business in Australia last year. past.
Like other entities, Citi fared much better in its retail banking business, and especially cards, than in investment banking, where revenue fell 64% to $631 million as the Increased macroeconomic uncertainty and volatility continued to affect client activity. That banking business is the one that is being “most affected by the macroeconomic environment, with a reduction in the flows of operations and a lower appetite for mergers and acquisitions,” said its president, Jane Fraser.
Jane Fraser, president of Citigroup, in a hearing in the US House of Representatives, on September 21, 2022.
The bank took advantage of the presentation of results to announce that it will end almost all the institutional banking services it offers in Russia at the end of the first quarter of 2023.
Wells Fargo’s third quarter profit fell 31% year-on-year, from 5,122 to 3,528 million dollars, with some dynamics similar to those of JPMorgan, although the San Francisco-based entity is much more focused on commercial banking for individuals and small and medium-sized companies. Its interest margin grew by 36%, to 12,098 million dollars. However, it went from releasing 1,395 million net in provisions to having to provide 784 million, as reported in a statement. Wells Fargo also felt the slowdown in the mortgage business due to the rise in interest rates, which has caused home sales to fall. We will continue to prudently manage our capital levels to be adequately prepared for a number of scenarios, including a slowing economy and market volatility.
Wells Fargo was further weighed down by a $2 billion charge “related to litigation, customer compensation and regulatory issues primarily related to a variety of historical issues,” Scharf explained. The entity was involved a few years ago in a scandal due to the opening of ghost accounts without the authorization of clients, who were also charged expenses for cards and other services without their consent. The bank still drags compensation for these fraudulent practices, which also cost multimillion-dollar fines.
Goldman Sachs has been the last to present its accounts this Tuesday and the one that has suffered a greater drop in profits, of 44%, to 2,962 million. The bank is more dependent on the investment banking business and has suffered a 57% drop in net income there, to 1,576 million dollars. All types of commissions plummeted, those for underwriting fixed and variable income issues and advisory fees, due to the slowdown in the capital markets.
Added to this are lower revenues from asset management and higher credit provisions. The improvement in the intermediation business in the markets and the improvement in the banking business for individuals are not enough to counterbalance all this impact. Goldman has taken advantage of the presentation of results to announce a reorganization of its business, grouping investment banking and intermediation in the markets in an area called Global Banking and Markets, also uniting asset and wealth management in another division and leaving a third for platforms, which includes its alliances with Apple and General Motors in cards and its GreenSky digital brand.
Morgan Stanley’s profit fell 29%, to 2,632 million, but in his case it was not due to higher credit provisions (they went from only 24 to 35 million), but to the 55% drop in investment banking income, from 2,849 to 1,277 million dollars, according to the entity. Within that business, commissions for underwriting and placement of shares sank from 1,010 to 218 million in a slow-moving capital market due to economic uncertainty and the fall in the stock markets. Its chief executive, James Gorman, suggested at the earnings call to analysts that the entity is considering job cuts. “We are looking at the number of employees. (…) We have learned a few things during the covid pandemic about how we can operate more efficiently. That is something that the management team will be working on between now and the end of the year,” he said. The crisis also threatens the giants of Wall Street.