Big banks are not afraid of recession
2023.01.12 13:47
Big banks are not afraid of recession
Budrigannews.com – A recession in 2023 poses little threat to big banks. They are in better shape than they were a decade ago, with numerous watchdogs keeping them honest and substantial safeguards against delinquent debtors. Nevertheless, rising costs from a variety of sources will continue to gnaw at the profit of large U.S. lenders in the coming year. It’s more like an ant invasion than a bear attack.
On Friday, JPMorgan (JPM.N), Bank of America (BAC.N), Wells Fargo (WFC.N), and Citigroup (C.N) will all release earnings reports for the fourth quarter. The good news is that falling investment banking fees should more than make up for rising interest rates and expanding loan books in the coming year. According to Jefferies, JPMorgan’s net interest income in 2023 could reach $75 billion, which is $22 billion more than it was in 2021, the year before the Federal Reserve began raising interest rates. Bank of America’s could reach $60 billion, an increase of $17 billion in two years.
Therefore, despite the slowdown in the economy, banks are doing fine. The issue is that many people are competing for a share of their windfall, both directly and indirectly. Customers, government officials, and, most importantly, employees are among these. Analysts anticipate lower fourth-quarter earnings per share for all four banks, and Refinitiv data indicates that the average valuation of 1.2 times estimated book value for U.S. lenders is likely to be the best it can be.
Depositors are in charge of the raid on the profit picnic of banks. Savings rates are rising after years of negligible interest on their accounts. This is demonstrated by a metric known as deposit beta, which measures the proportion of rate hikes passed on to customers. Deposit betas have been around 50% in previous cycles, so a 2 percentage point increase in the central bank’s rate would result in a 1 percentage point increase in the rate that depositors receive. However, the majority of lenders’ betas are currently lower than half that historic level. Approximately one quarter of Citi’s expenses and one sixth of those of JPMorgan and Bank of America are made up of interest paid.
Banks will attempt to maintain low numbers. After Covid-19, they have a lot of deposits, so there is less pressure from competitors to entice customers with attractive savings rates. Moneylenders like US Bancorp (USB.N) and Locales Monetary (RF.N) say betas this time round could settle around 30%. However, pressure may increase, and no bank wants to see a large number of customers leave. M&T Bank (MTB.N) finance chief Darren King believes that online savings rates are approaching 3%, a “magic” level above which depositors shop around.
Regulators, like savers, will make extensive use of the earnings buffet. Even if borrowers are still in good health, rules that went into effect at the beginning of 2020 require banks to take fees to cover bad debts when the economic outlook is bleak. Jamie Dimon of JPMorgan has referred to this system as “crazy.” However, he and his peers must adhere to it. Wells Fargo analysts believe that as a result, loan-loss provisions could nearly double annually in 2023, consuming approximately 10% of the industry’s net interest income.
Other, difficult-to-predict regulatory incursions will occur. The Consumer Financial Protection Bureau’s Rohit Chopra is focused on lending discrimination and vaguely defined “junk fees.” In December, Wells Fargo was forced into paying a $3.7 billion settlement by the Consumer Financial Protection Bureau (CFPB) for unfairly charging customers. Meanwhile, a “holistic review” of bank capital has been announced by Michael Barr, the new supervisory head of the Federal Reserve, indicating that required levels may rise. In an effort to replenish the fund that safeguards depositors from bank failures, even the Federal Deposit Insurance Corporation is cutting a larger portion of lenders’ earnings.
However, internal cost pressure is the greatest. At JPMorgan and Citi, compensation accounts for about 40% of total costs, while at Wells Fargo, it accounts for as much as 56%. According to data from the Labor Department, wages in the financial services industry are rising by about 4% annually. Brian Moynihan, CEO of Bank of America, has promised to keep increasing them for employees with lower pay.
By using the axe, banks can at least somewhat control this expense. At Morgan Stanley (MS.N) and Goldman Sachs (GS.N), which is laying off approximately 6% of its employees, layoffs are already taking place. Bonuses will reflect the new conservatism for bankers who do not receive pink slips. Despite David Solomon’s company having slightly more employees, analysts anticipate that Goldman’s total wage bill for 2023 will be almost one fifth lower than in 2021, according to Refinitiv. As a result, bonus cuts will be much more severe.
Slashing pay can help halt the advance of the profit-seeking ants because it accounts for such a large portion of banks’ expenses. Based on data from the first nine months of 2022, a 5% reduction in compensation would offset a 12% increase in interest costs or a 50% increase in bad debt charges at JPMorgan, Wells Fargo, Bank of America, and Citigroup collectively. Lenders who reduce their workforces should take precautions to avoid having their valuations wiped clean, even though 2023 is unlikely to be a vintage year.
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