Leading U.S. banks, namely Citigroup, JP Morgan Chase, Morgan Stanley, and Wells Fargo & Co, kicked off reporting season last week and released their quarterly earnings on the 14th of October 2022. Bank of America reported on the 17th of October and Goldman Sachs was the last major U.S. bank which reported its earnings on Tuesday the 18th of October. Most of the results were similar to Q2 earnings, but with a less-upbeat outlook for the rest of this year and 2023. Revenue and earnings were up in most cases, beating Wall Street expectations. They made clear that the Federal Reserve’s hawkish policy is impacting their performance as they started increasing provisions for potential credit losses. The common themes from the results among the major banks were drop in profitability, increases of bad loans provisions, personal banking divisions boosting revenues, while investment banking divisions are getting hit.
Similar to Q2, profits fell in Q3 on YoY basis.
• Citigroup profit fell 25%
• JPMorgan profit declined 17%
• Morgan Stanley profit tumbled 30%
• Wells Fargo profit decreased 31%
• Bank of America had the smallest profit decline of 8%
• Goldman Sachs profit down 44%
Most of the banks stated that their falling profits were caused by increases in their loan provisions. While the current loan delinquencies remain low as employment is strong and customers continue to repay their loans, the increases in loan provisions are ignited by the looming recessionary risks.
• Citigroup added $370 million to its loan provisions
• JPMorgan added $808 million
• Morgan Stanley set aside $35 million, up 46% from Q3 2021
• Wells Fargo reserved $784 million
• Bank of America set aside $378 million
• Goldman Sachs reserved $515 million, compared to $175 million last year
The rising interest rates were beneficial for the banks, as interest income drove revenue, but the downturn in M&A activity and equity raisings led to poor investment banking performance.
After positing Q2 2022 earnings, Bank CEOs trumpeted the robustness of their businesses, stating their capital reserves were strong and that they were prepared to weather the economic downturn. While the banks are still in a relatively secure position, CEOs have changed the tone at the release of Q3 earnings. Most of the banks are predicting a recession in the U.S. at some point in 2023, citing the inflation, the war in Ukraine, Fed’s tightening policy, and supply chain disruptions.
Let’s have a look at the quarterly numbers of Citigroup and JPMorgan on which we have long and short ETPs.
The U.S. banking giant, exceeded market estimates, helped by both increased interest income following the Fed’s recent interest rate hikes and profit from the sale of its Asian consumer business.
• Revenue up 6% to $18.51billion
• Net income down 25% to $3.5billion
• Earnings per share (EPS) down 24% to $1.63
Revenues increased 6% YoY to $18.51 billion, ahead of analyst estimates for $18.25 billion, this was primarily due to the gain on sale of the Philippines consumer business in the quarter and the loss on the sale of the Australian consumer business in the prior-year period. Excluding these divestment impacts, revenues were down 1%, as growth in net interest income was more than offset by lower non-interest revenues.
Net income of $3.5 billion in Q3 2022 decreased 25% from Q3 2021, primarily driven by higher cost of credit and the higher expenses, which were partially offset by the increase in revenues.
Earnings per share fell 25% to $1.63 from Q3 2021, hindered by increased bad debt provisions and lower investment banking fees, despite being helped by a $520 million profit for the sale of its Asia business. Excluding the business disposal, earnings of $1.50 still surpassed Wall Street estimates of $1.40 per share.
Citi’s main divisions are Personal Banking & Wealth Management (PBWM) and Institutional Clients Group. PBWM revenues rose 6% YoY to $6.2 billion, pushed higher by increased interest income following the interest rate hikes, and stronger loan growth for businesses.
Revenues for its Institutional Clients Group division decreased 5% from Q3 2021 to $9.47 billion, hit by a drop in investment banking fees and fall in activity for its equity related unit. More favourably, Treasury and trade solutions revenues grew to $3.2 billion, rising 40% YoY, helped by the strong U.S. dollar.
According to CEO Jane Fraser, the banking business was the most adversely impacted by the macro environment with reduced deal flows and a lower appetite for M&A. Citi also previously halted its share buyback programme given the uncertain economic outlook. The company continues to shrink its operations and exposure to Russia and will be ending almost all of its institutional banking services by the end of Q1 2023 and will leave only those operations necessary to fulfil its remaining legal and regulatory obligations. Citigroup returned $1 billion in capital to its shareholders and ended the quarter with a CET1 ratio of 12.2%.
The highly uncertain economic outlook, elevated inflation, and the cost-of-living crisis are factors that cannot be neglected. Heightened geopolitical tensions, reduced geographical diversity given its retreat from consumer markets in Asia and the volatile and cyclical nature of the investment banking services are also worth considering.
On a positive note, the more focused strategy and the interest rate rises are beneficial, allowing for wider margins between deposits and lending, plus the 4.5% dividend yield, which is certainly attracting investors.
JPMorgan Chase is the largest bank in the U.S. by assets, with operations covering both traditional consumer and corporate banking along with investment banking and asset management. The company exceeded market expectations on both revenue and earnings lines amid series of tail and headwinds.
• Revenue up 10% to $33.5 billion
• Net income down 17% to $9.74
• Earnings per share down 17% to $3.12
Q3 2022 revenue jumped 10% to $33.5 billion from Q3 2021, exceeding market forecasts of $32 billion, helped by rising interest rates in the U.S.
Net income during Q3 2022 fell 17% to $9.7 billion from Q3 2021. The groupwide fall was driven by a net credit reserve build of $808 million compared with a net reserve release of $2.1 billion in the prior year. For the quarter, losses from net investment securities were $959 million, which led to a $729 million fall (after tax) in net income. The corporate and investment banking unit endured a 37% slump in net income of $3.5 billion, whereas a net revenue fell by 4% to $11.9 billion. Net income at the asset and wealth management unit was reported to be $1.2 billion, up 2% and the net revenue was $4.5 billion, up 6%. This was primarily due to deposits and loans on higher margins and balances, offset by lower management fees due to unfavourable markets.
Earnings declined in Q3 2022 by 17% to $9.74 billion or $3.12 a share from Q3 2021, impeded by the addition of $0.8 billion in bad debt provisions. Still the profit is higher than analysts’ estimates of $2.88 per share.
Assets under management for its wealth division plummeted 13% to $2.6 trillion due to falling markets and net outflows from liquidity products.
The company reported a 34% increase in net interest income (NII) to $17.6billionn. Driven by the rising interest rates, NII excluding markets soared 51% to $16.9billion. The strong NII in Q3 and the possibility to continue to improve in the near-term due to higher interest rates, shows the bank’s operating leverage is strong, and the possibility to start buy-backs again next year. JPMorgan paused share repurchases in early 2022 in order to build capital to meet new regulatory requirements, given the rising economic and geo-political uncertainty.
CEO Jamie Dimon said: “JPMorgan Chase delivered solid performance across our businesses as we generated $9.7billion in net income, managed revenue of $33.5 billion, and a CET1 capital ratio of 12.5%. While we unfortunately still do not know the ultimate effect of changes in capital requirements due to the completion of Basel III, through our earnings power and demonstrated ability to manage down risk-weighted assets, we expect to reach our current target CET1 ratio of 13%, which includes a 50-basis point buffer, in the first quarter of 2023”.
The company declared a Q3 dividend of $1 per share, which is yielding around 3.5% and was the same in the previous quarter.
The highly uncertain economic outlook caused by rising inflation, squeezed consumer incomes, and heightened geopolitical tensions are some of the red flags the company faces. Further aggressive interest rate hikes could push the US economy into recession, increasing potential future bad debt provisions.
On a positive note, the business diversity, investments in technology, and rising interest rates can be beneficial for the bank, as it increases its ability to widen the margin between deposit and lending rates.
Overall, we have seen equity analysts skewing their forecasts to the downside to ensure the stocks they cover “beat”. This practice is common around the world, but it is particularly bad in the U.S. with high beat rates occurring every quarter. This results in a spike in the share prices after the earnings release, but so far this year earnings pops did not produce sustained rallies, and this time it won’t be any different. The headlines dominating the press this week is certainly pointing to the resilience of banks earnings. We have seen Citigroup and JPMorgan’s share prices jump on the results fuelled by fresh buying from the surprised by the earnings beats, which in turn squeezes short positions.
The global economy is headed for a slowdown, with central banks pressing on with tightening monetary policies, which could turn to be the most aggressive cycle of interest rate hikes since the late 1980s, as inflation remains at elevated levels. The spectre of significantly higher interest rates has sent shockwaves through global markets, and most U.S. banks CEOs are concerned that the Fed’s efforts to rein in inflation will lead to a recession sometime next year. The rising interest rates is slowing global economic growth and will likely keep equity markets under pressure. Until the tightening cycle approaches terminal levels, it might be too early to think of reversal of the bear market.
Given the current fundamental backdrop, the Fed is unlikely to pivot in a meaningful manner in the short-term, therefore the current spikes in the banks share prices are unlikely to extend much higher, let alone to form solid bottoms on the charts. We see the current bounce in the share prices of Citi and JPMorgan as an opportunity to lighten up, rather than load up, with the next major leg down likely to unfold between reporting seasons.
Active traders looking to gain exposure to Citigroup and/or JPMorgan Chase may use our -1x Citigroup and -1x JPMorgan ETPs to take advantage of another potentially upcoming decline. For magnified exposure on the banking sector our +3x Financials and -3x Financials ETPs could be used to benefit from future up and down swings.
In the UK banks reporting season is fast approaching with banks facing similar macro-economic pressures as peers in the U.S. Stay tuned and keep an eye on upcoming updates for our HSBC and Barclays ETPs.
HSBC reports on the 25th of October.
Barclays reports on the 26th of October.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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