Patrick Donnelly, Manager, Client Consulting

4Q22 Banking Results

The country’s largest banks have reported fourth quarter earnings with somewhat mixed results, though many trends from the third quarter have continued. The persistence of the Federal Reserve’s rate hikes coupled with a looming recession has created an internal push-and-pull on banking financials. Revenue generated from existing variable rate debt has naturally increased and propped up a large slowdown in mortgage lending and investment banking activity. Once again, we saw trends on loan loss provisions and consumer revolving debt balances that point to a potential economic slowdown.

JPMorgan and Bank of America enjoyed positive earnings surprise as net income exceeded expectations by 16% and 10% respectively. Both institutions benefitted from net interest income increases that were able to offset 50%+ pullbacks in investment banking revenue. Wells Fargo was not as fortunate as litigation and regulatory fines exceeded $2.8 billion in after-tax operating losses while rate increases put the brakes on mortgage loan origination, a business they rely on more than others. Goldman Sachs saw its largest earnings miss in over a decade as operating costs increased 11%, mostly due to wage inflation. Goldman Sachs is one of the first banks to announce large-scale layoffs as reports indicate it could be eliminating up to 3,200 members of its workforce.

At the time of this writing, the Dow Jones U.S. Banks Index is up about 5.50% year-to-date, outpacing the S&P500 by about 225bps. It begs questioning if this trend can persist, or if it is a flash of optimism before rough waters ahead. The four banks mentioned above released loan loss provision figures that rose significantly and exceeded a combined $5 billion. On the consumer banking side, deposits remained relatively flat while credit card usage and revolving debt balances rose. Bank of America specifically reported that credit card balances were up 14% and JPMorgan reported balances that are back to pre-pandemic levels. During the Covid shutdowns, many consumers were able to grow their nest eggs. Working from home and spending less money on recreational activities reduced household expenses, while government stimulus provided cash injections and loan deferrals. Signs are now starting to point to a reversal of that trend, and potential layoffs may make things worse.

If and when the Federal Reserve reaches its terminal rate, one would expect the net interest income windfall banks have enjoyed in the short-term to level off. If that happens, longer-term results may hinge on the ability to collect on outstanding debt, commercial appetite for growth, and consumer demand (and ability) for buying homes.

Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.