Sshareholders like Profits: A steady stream of income you can count on, quarter after quarter. However, the profits that America’s largest banks make are often pushed around by the bank volatility the economy they serve. When the economy accelerates, the demand for credit increases; If it slows, bankers will have to reserve for bad loans. Investment banks’ trading businesses tend to do well in times of volatility and uncertainty, but their advisory services sell best when markets are healthy and stable. Bank bosses must try to balance their exposure to these forces.
The past three years, during which the American economy has experienced a pandemic-related shutdown, a financial boom and an interest rate shock, have been unusually volatile. As a result, this period was an interesting test of how successful bank chiefs were in their efforts to balance their companies’ performance. Results were presented between January 13 and 17, when Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo announced their fourth quarter and full year results.
Overall, the six banks’ profits fell 20% from $34 billion in the fourth quarter of 2021 to about $27 billion in the same period of 2022 — but the pain wasn’t shared evenly. Earnings at JPMorgan and Bank of America rose modestly. At Goldman Sachs, on the other hand, they were down by two-thirds. Some of these differences can be explained by their different strengths. Companies with large consumer banks like Bank of America and JPMorgan typically do well when interest rates rise. Rising interest rates tend to increase the difference between banks paying out deposits and income from loans. Net interest income, as this gap is called, has skyrocketed in 2022 (see chart). It climbed $17 billion to $66 billion between the end of 2021 and 2022, across the big six banks.
This increase will be partially offset by the fact that higher interest rates will make it harder for consumers and businesses to repay debt. Banks also set aside about $7.2 billion for loan losses in the fourth quarter of 2022. JPMorgan chief Jamie Dimon and Bank of America chief Brian Moynihan both forecast a mild recession in America this year. Still, the net effect of higher interest rates on earnings remains positive for now.
Investment bank earnings, which plummet when stock markets do poorly, fell about 50% at Goldman and Morgan Stanley. But the divergence in earnings cannot simply be explained by the different performance of investment and consumer banks. For one thing, profits at Morgan Stanley, where non-investment bank businesses were still doing well, fell far less sharply than at Goldman. Second, despite its large consumer bank, Wells Fargo delivered another dismal quarter with earnings half what they were a year ago. Wells’ pain may be explained by regulatory issues. In December, the bank agreed to pay a huge $1.7 billion fine to the Consumer Financial Protection Bureau for improperly managing millions of consumer accounts.
The situation at Goldman is more difficult to explain. The Company wanted to build a consumer bank, in part to diversify its business. But it has had to set aside unusually high loan loss provisions in this area and is now scaling back its efforts. “What went wrong?” asked an analyst on Goldman’s Jan. 17 conference call. David Solomon, the bank’s chief executive, argued that the firm had tried to do too much too quickly and lacked the talent to see through some of its far-reaching ambitions. Six days earlier, the company laid off 6.5% of its workforce. America’s big banks have all faced the same huge economic shocks in recent years. These have shown how different they have become – and how well they have been managed. ■
