Banks post big profits, but lower interest rates are a worry
Goldman Sachs profit falls 24% as legal expenses mar results; Bank of America Q4 dips
NEW YORK, Jan 15, (AP): So far, it appears 2019 was another record year for Wall Street.
Trading of stocks and bonds rebounded after a terrible end to 2018 and consumers spent tons of money on their credit cards, buoyed by a strong job market and steady economic growth. On Tuesday, JPMorgan Chase reported a record annual profit, while Citigroup posted its best results since before the Great Recession.
“Given record-high equity prices, very low unemployment, a growing economy at about 2%, a stable US dollar, and positive developments in trade, it is not surprising to see the results that are coming in,” said Mark Doctoroff, global co-head of the Financial Institutions Group at MUFG. “Net interest margins may be suffering because of interest-rate cuts, but the consumer businesses and the trading results, combined with solid investment and wholesale-banking earnings, are making this a good year.”
The biggest concern going forward is that lower interest rates will slow down Wall Street’s decadelong profit party. The Federal Reserve cut interest rates three times in 2019, each time by a quarter of a percentage point. That’s started to cut into bank’s interest income the difference between what a bank charges for loans and what it pays out on deposits - which has been a major profit driver in the last couple of years.
The improved results at JPMorgan and Citigroup were partly attributed to a surge in trading revenue. In late 2018, plunging stock markets and fears of a possible recession weighed on bank profits in the final quarter. In 2019, the Fed’s rate cuts and a “phase one” trade agreement between China and the US helped alleviate recession fears. Revenue from trading jumped 55% at JPMorgan and 49% at Citi in last year’s fourth quarter.
The banks’ other businesses did well, but lower interest rates were a hurdle. JPMorgan Chase’s net interest revenue fell 2% while the same metric at Citigroup fell 1%.
Wells Fargo also reported quarterly earnings Tuesday. Its results are messy due to the fact the bank is mired in unending legal troubles and is restrained from growing its business by the Federal Reserve. The bank took a $1.5 billion charge last quarter to cover its legal costs. Even setting aside the legal issues, things do not look good for Wells Fargo, which is more susceptible to fluctuations in interest rates because of its large consumer banking business. It saw interest revenue fall 8%.
Bank executives say that the US economy is healthy and growing steadily, and the American consumer is spending and borrowing with confidence, which should keep bank profits healthy in 2020. The biggest challenge could be lower interest rates, as the Fed has signaled it intends to keep rates steady for the foreseeable future.
“Lower interest rates make it a lot harder to grow profits from here,” said Kyle Sanders, an analyst with Edward Jones who covers Wells Fargo. “A lot of things have to go the right way to keep this earnings momentum for the banks.”
But other analysts say that if banks continue to cut costs to make up for falling interest rate revenue, and the US economy keeps growing steadily, banks could have another highly profitable year in 2020.
Consumer banking giant Bank of America said Wednesday that its fourth-quarter profits fell 4% from a year ago, as the bank was impacted by the rapid decline of interest rates in late 2019.
The Charlotte, North Carolinabased bank said Wednesday that it earned a profit of $6.99 billion, or 74 cents a share, down from a profit of $7.29 billion, or 70 cents per share a year ago. BofA bought back roughly 900 million shares between 2018 and 2019, which is why the pershare earnings rose while the bank’s overall profit fell.
Still the bank’s profits beat expectations. Analysts were looking for
BofA to earn 68 cents per share.
Bank of America, the nation’s second-largest bank by assets, is particularly impacted by movements in interest rates since it sells a range of consumer banking products, and its balance sheet is more aligned with short-term bonds and other securities. That made the bank more sensitive to the Federal Reserve’s decision last year to cut short-term interest rates three times to shore up the US economy.
The bank’s quarterly interest income fell more than $900 million year over year, from $17.84 billion to $16.93 billion. Reflecting the impact of declining interest rates, BofA’s net interest margin fell to 2.35%.
Goldman Sachs said its fourthquarter profits dropped by 24% from a year earlier, as the bank had to set aside money to cover its looming settlement with US authorities over its role in a Malaysian sovereign wealth fund scandal.
The investment bank said Wednesday that it earned a profit of $1.72 billion in the quarter, or $4.69 a share, down from a profit of $2.32 billion, or $6.11 per share, a year earlier. The results missed analysts’ expectations for earnings of $5.47 a share.
Despite having a strong quarter in trading, Goldman’s results were marred by significantly higher expenses. The bank set aside roughly $500 million more to cover its legal expenses in the quarter. The bank is currently negotiating a settlement over its involvement in 1MDB, a Malaysian government-sponsored investment fund that became a conduit for high-level Malaysian officials to launder money out of the country.
Malaysia’s prime minister was arrested as part of the scandal, and another official is a fugitive and his whereabouts are unknown. Two former Goldman Sachs bankers have been charged for their role in helping 1MDB launder money.
The bank also had a big jump in its compensation expenses, setting aside $3.05 billion in the quarter to pay its well-compensated employees, compared with $1.86 billion a year earlier. Many of Goldman’s employees earn the bulk of their pay in large year-end bonuses. For the full-year, however, compensation and benefits costs at the bank were basically flat - reflecting the difficult year Goldman had in many of its businesses.
The expenses overshadowed what was a pretty decent quarter for Goldman, reflecting financial markets’ overall performance in the last three months of the year. Trading revenues were up 33% from a year earlier, lead by a massive jump in revenue from trading bonds, commodities and currencies.
For the full year, Goldman had a profit of $7.9 billion, down from $9.86 billion in the same period a year ago.