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.

Citigroup

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.