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Banks Provide Grim Q3 Fee Income View, Rising Rates to Aid
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At an investor conference, the top executives of major banks came out with a disappointing third-quarter 2022 fee income picture. This, along with high August inflation numbers, weighed on investor sentiments. This resulted in a plunge in banks’ shares yesterday.
Speaking at the conference, JPMorgan’s (JPM - Free Report) chief operating officer Daniel Pinto noted that the slowdown in deal-making is showing no signs of reversal as clients remain on the sidelines amid ambiguity over inflation, the Federal Reserve’s rate hikes and the prospects of a recession. The bank expects investment banking (IB) revenues in the third quarter to plunge 45-50% year over year. 2021 was a record year for the IB business with a bull market for capital market activities.
JPM is not the only company facing this adverse situation. This industry-wide concern will also hurt major investment banks like Goldman Sachs (GS - Free Report) and Morgan Stanley. While both these companies didn’t provide any numbers, the head of Morgan Stanley Wealth Management, Andy Saperstein, said at the conference that IB activity was “muted” in the September-end quarter, with the advisory business offering some support.
Given this grim situation, Goldman Sachs is planning to cut nearly 500 jobs as early as this month. In July, during the second quarter conference call, the company executives had warned of cutting expenses as the economic outlook deteriorates. The company also intends to reinstate its annual performance review for employees at 2022-end, a process it had put a pause on during the pandemic.
In an opposite stance compared with GS, both JPMorgan and Bank of America (BAC - Free Report) expressed caution regarding job cuts. While BAC at present seems to be satisfied with its staff level, Pinto noted that the bank could make adjustments to compensation for managing expenses. For 2022, JPM expects adjusted expenses to increase almost 7% year over year.
Though another major Wall Street bank, Citigroup (C - Free Report) didn’t comment on job cuts, the bank too is facing similar gloomy situation regard with the IB business. The company’s chief financial officer Mark Mason said the IB fees are likely to be down 50% from the prior-year quarter. He also gave a dismal trading operation picture, with C’s market revenues expected to be down in the mid-to-high single-digit range.
On the other hand, for JPMorgan, the trading business will provide some support. Pinto noted that fixed income trading volumes benefited from heightened market volatility and also offset lower equity trading. In the third quarter, the bank’s markets revenues are anticipated to be up almost 5% year over year.
Additionally, the mortgage business continues to witness a downtrend. Wells Fargo (WFC - Free Report) and U.S. Bancorp are seeing downward pressure on mortgage income as consumers get affected by rising mortgage rates and the housing market slows down. Terry Dolan, the chief financial officer of U.S. Bancorp, said that mortgage revenues are likely to drop 30-35% in the third quarter on a sequential basis.
Despite this grim fee income picture, bank executives sounded upbeat about rising interest rates and their impact on net interest income (NII). Both BAC and WFC expect a solid rise in NII on account of higher interest rates. The chief financial officer at Wells Fargo, Mike Santomassimo, said, “We still feel really comfortable about the 20% increase on a full-year basis,” while loan growth is likely to gradually moderate. Likewise, Brian Moynihan, the CEO of Bank of America, commented, “We're going to get a big bump in NII.”
Parting Thoughts
With expectations that the Fed will continue to raise interest rates till the inflation numbers come down drastically, the operating backdrop is likely to turn gloomy and the economic outlook will worsen. At present, fee income constitutes a large portion of most major banks’ revenue mix. Hence, such a scenario will turn out to be a big headwind for banks, though rising rates will support NII growth.
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Banks Provide Grim Q3 Fee Income View, Rising Rates to Aid
At an investor conference, the top executives of major banks came out with a disappointing third-quarter 2022 fee income picture. This, along with high August inflation numbers, weighed on investor sentiments. This resulted in a plunge in banks’ shares yesterday.
Speaking at the conference, JPMorgan’s (JPM - Free Report) chief operating officer Daniel Pinto noted that the slowdown in deal-making is showing no signs of reversal as clients remain on the sidelines amid ambiguity over inflation, the Federal Reserve’s rate hikes and the prospects of a recession. The bank expects investment banking (IB) revenues in the third quarter to plunge 45-50% year over year. 2021 was a record year for the IB business with a bull market for capital market activities.
JPM is not the only company facing this adverse situation. This industry-wide concern will also hurt major investment banks like Goldman Sachs (GS - Free Report) and Morgan Stanley. While both these companies didn’t provide any numbers, the head of Morgan Stanley Wealth Management, Andy Saperstein, said at the conference that IB activity was “muted” in the September-end quarter, with the advisory business offering some support.
Given this grim situation, Goldman Sachs is planning to cut nearly 500 jobs as early as this month. In July, during the second quarter conference call, the company executives had warned of cutting expenses as the economic outlook deteriorates. The company also intends to reinstate its annual performance review for employees at 2022-end, a process it had put a pause on during the pandemic.
In an opposite stance compared with GS, both JPMorgan and Bank of America (BAC - Free Report) expressed caution regarding job cuts. While BAC at present seems to be satisfied with its staff level, Pinto noted that the bank could make adjustments to compensation for managing expenses. For 2022, JPM expects adjusted expenses to increase almost 7% year over year.
Though another major Wall Street bank, Citigroup (C - Free Report) didn’t comment on job cuts, the bank too is facing similar gloomy situation regard with the IB business. The company’s chief financial officer Mark Mason said the IB fees are likely to be down 50% from the prior-year quarter. He also gave a dismal trading operation picture, with C’s market revenues expected to be down in the mid-to-high single-digit range.
On the other hand, for JPMorgan, the trading business will provide some support. Pinto noted that fixed income trading volumes benefited from heightened market volatility and also offset lower equity trading. In the third quarter, the bank’s markets revenues are anticipated to be up almost 5% year over year.
Additionally, the mortgage business continues to witness a downtrend. Wells Fargo (WFC - Free Report) and U.S. Bancorp are seeing downward pressure on mortgage income as consumers get affected by rising mortgage rates and the housing market slows down. Terry Dolan, the chief financial officer of U.S. Bancorp, said that mortgage revenues are likely to drop 30-35% in the third quarter on a sequential basis.
Despite this grim fee income picture, bank executives sounded upbeat about rising interest rates and their impact on net interest income (NII). Both BAC and WFC expect a solid rise in NII on account of higher interest rates. The chief financial officer at Wells Fargo, Mike Santomassimo, said, “We still feel really comfortable about the 20% increase on a full-year basis,” while loan growth is likely to gradually moderate. Likewise, Brian Moynihan, the CEO of Bank of America, commented, “We're going to get a big bump in NII.”
Parting Thoughts
With expectations that the Fed will continue to raise interest rates till the inflation numbers come down drastically, the operating backdrop is likely to turn gloomy and the economic outlook will worsen. At present, fee income constitutes a large portion of most major banks’ revenue mix. Hence, such a scenario will turn out to be a big headwind for banks, though rising rates will support NII growth.