Mixed emotions



CCO at ActivTrades Corp

The upward trend in the stock market continued into 2023 for a second week. The reporting season in the US traditionally starts with the balance sheets of the large financial institutions. However, their quarterly figures were mostly worse than expected.

The big US banks often set the tone for the financial industry, and are in a league of their own in terms of profits. This was demonstrated again on Friday when the three major banks - J.P. Morgan, Bank of America and Citigroup - were the first listed US companies to present their figures for the 2022 fourth quarter and full year at the same time.

Big bank profits are seen as a key test of US corporate strength amid sharp Federal Reserve interest rate hikes. The largest, J.P. Morgan (JPM. US), increased its annual results to $37.7bn (2021: $46.5bn) thanks to a quarterly net profit of $11bn (10.2bn euros). Bank of America (BAC.US) earned $7.1bn after taxes in the fourth quarter, lifting its annual profit to $27.5bn (2021: $32bn). Citigroup (C.US) , the third in the group, achieved a quarterly profit of $2.5bn and thus increased its annual profit to $14.8bn (2021: $21.9bn).

The decline in profits year-on-year, ranging from 32 percent (Citigroup) to 14 percent (Bank of America), had already become apparent in the past few months. Institutions with a strong investment banking business, in particular, suffered from the low need for advice from corporate customers, who rarely went public or bought a competitor in 2022. Economic concerns were one reason why stocks plunged in 2022, suffering their worst year since 2008. As a result of the Wall Street slump, there was a major slowdown in merger activity and initial public offerings (IPOs).

More important for the US stock market than the continuation of the weak trend in investment banking, though, was that the US banks dampened expectations for net interest income in 2023.

Net interest income is the most important source of income for banks involved in retail and corporate lending. The money parked with banks (deposits) usually pays less interest than loans, so the banks make a margin here. The fact that US banks are now having to lower analysts’ expectations on interest rate margins is interesting for the entire banking industry, as this business only became interesting again in 2022.

Despite the missed forecasts by analysts’, the share prices for the ‘big three’ rose slightly during the final trading day of last week. Goldman Sachs and Morgan Stanley plan to present their annual reports next week, followed by Deutsche Bank on February 2.

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