NEW YORK, Jan 23 (Reuters Breakingviews) - After three years of upheaval, it’s natural to yearn for a bit of normal. According to America’s biggest banks, which have unrivalled insight into what makes households and companies tick, normal is a long way off.
Based on the full-year earnings they disclosed over the last two weeks, financial institutions exited 2022 in a very different state from how they ended 2019. They have more deposits, more loans and more staff. And while some important numbers, such as deal-making fees, have collapsed, others remain inflated, including the revenue generated from trading stocks and bonds.
Where all these things settle is a giant parlor game. Chief among the mysteries is how much interest banks will harvest in 2023 and beyond. It’s a critical valuation input, as it typically represents half their revenue. Some are giving clues, but others are cagey. JPMorgan (JPM.N) said interest income could be $73 billion this year, its highest ever, but finance chief Jeremy Barnum warned that involves “a lot of guessing.” Bank of America (BAC.N) won’t be drawn on what it expects.
No wonder they’re cautious. Interest rates have risen at their fastest pace on record as the U.S. Federal Reserve has gone all out to tackle inflation, which is now slowing but sits higher than the central bank’s 2% target. Even a 25-basis point shift can have significant effects on a $1 trillion loan book like Bank of America’s, as well as on enormous securities holdings. The central bank reckons rates could crest at just over 5%, but JPMorgan boss Jamie Dimon on Thursday suggested to CNBC that he thinks 6% is more likely.
Even then, the link between benchmark interest rates and the rate banks actually charge is getting harder to forecast. One reason is that non-bank lenders, from private equity firms to credit funds, have proliferated since official borrowing rates were last this high, in 2007. The premium companies pay over risk-free rates, which ought to reflect their relative chances of default, has barely budged above 2019’s level, according to the BofA ICE index, even though economic forecasts have weakened.
This environment creates more dissonance over what constitutes normal, and when it might return. While most banks have a reasonable idea of what kind of bad debts to expect in a traditional credit cycle, they are for now under pressure to lend at rates that jar with their broader view of the world. As PNC Financial Services (PNC.N) boss Bill Demchak puts it: “Either spreads are going to widen or our economic forecast is wrong.”
Customers, who make up the other side of the interest equation, are equally enigmatic. Their deposits soared during Covid-19, and their spending came down. Bank of America boss Brian Moynihan said that depositors who used to have roughly $3,500 with the bank now have almost four times more. The figure is falling, but not evenly. The richest clients, Moynihan says, already have moved much of their wealth to more lucrative investments.
Most are trying to offer extra services to stop customers going elsewhere, or at least to be less demanding about what they get paid on their savings. An example is Bank of America’s artificial-intelligence financial assistant, Erica. But the free money feast will surely end. At PNC, deposits that pay no interest account for 29% of total customer balances. Before Covid-19 struck, they were 25%. There’s no reason they couldn’t end up lower, as they were before the 2008 financial crisis.
Then there are the wobbly markets. Profit generated from buying and selling stocks, bonds and commodities at Goldman Sachs (GS.N), Morgan Stanley (MS.N) and elsewhere shot up through the pandemic and hasn’t receded. The five biggest trading firms made $110 billion in 2022, around $30 billion more than in 2019. Will it go back to that level? Maybe not. Morgan Stanley finance chief Sharon Yeshaya postulated last week that future revenue might be higher than it used to be, as international monetary policies diverge.
All these abnormal factors are a problem for investors, but they’re a bigger problem for the banks themselves. They have to decide where to put assets, human as well as financial. Goldman just laid off 6% of its workforce, but it remains bigger than it was in 2019; Bank of America says it’s still hiring. That’s always a gamble, but with so much up in the air, such decisions get riskier, especially for Main Street banks, where most pay is less geared to individual performance.
To that end, the fog is arguably less troublesome for Goldman and Morgan Stanley than it is for JPMorgan, Bank of America and Citigroup (C.N). The trio’s collective revenue should be around 15% higher in 2024 than it was in 2019, according to analysts’ estimates gathered by Refinitiv. At the same time, their compensation bills are forecast to be nearly 30% steeper. Pre-Covid employee productivity is one banking norm that is not destined to return anytime soon.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
The biggest U.S. banks took charges against future bad debt as they reported earnings for the fourth quarter on Jan. 13, and cautioned that actual losses on lending had yet to revert to pre-Covid-19 levels. Each of them also reported a sharp drop in investment banking revenue.
JPMorgan booked a $2.3 billion provision to cover bad loans, compared with around $1.5 billion in the preceding quarter. It said that the share of credit-card loans it might have to write off could rise to 2.6% in 2023, compared with 1.5% in 2022.
Bank of America increased its credit charges and said 1.7% of credit card loans had been written off, on an annualized basis, compared with a 2.7% average rate since 2013. Citigroup also said that credit card losses had yet to “normalize”.
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