Banks note gains, steel for rainy day
Citigroup’s fixed-income traders turned in a record-setting finale to 2022 as the bank and others, under pressure to improve returns, braced for a less certain economy.
The positive, albeit grim, results came amid a tranche of similar quarterly financial reports Friday from rivals Wells Fargo, Bank of America and JPMorgan Chase as the biggest U.S. companies begin detailing the final three months of 2022.
At Citigroup, total trading was up 18% — trouncing the 10% increase predicted by executives just last month.
That windfall and stronger earnings from credit cards helped Citigroup beat analysts’ estimates for revenue and profit, even as other challenges became clearer — including a potential recession. The company failed to cut expenses as much as analysts predicted and set aside more than analysts expected for souring loans.
“We intentionally designed a strategy that can deliver for our shareholders in different environments,” CEO Jane Fraser said in a statement. The bank is “very much on track” to meet targets for improving returns, Fraser said.
Citigroup said revenue in 2023 is likely to reach between $78 billion and $79 billion, higher than the $76 billion for which analysts in a Bloomberg survey were currently calling.
Costs, meanwhile, are expected to be $54 billion, which also tops estimates. Both forecasts exclude impacts tied to the bank’s work to exit more than a dozen international retail units.
The quarter’s 21% drop in net income for Citigroup to $2.5 billion was less severe than analysts predicted.
Operating expenses dipped 4% to $13 billion in the quarter, still more than the $12.9 billion analysts estimated. Excluding costs from exiting the international retail units, expenses rose 5%.
Provisions for souring loans amounted to $1.8 billion, a contrast from a year earlier, when the lender released prior reserves. This time, the firm blamed a worsening macroeconomic environment as it added them back.
The figure includes $1.2 billion in credit losses, which were up 36%.
SWELLING EXPENSES
Wells Fargo posted higherthan-expected fourth-quarter expenses, even after the bank warned of a hefty loss tied to a regulatory sanction.
The firm spent $16.2 billion in the last three months of the year, according to a statement, exceeding analyst estimates. That included $3.3 billion in operating losses after Wells Fargo said last month it would book costs for a settlement with the Consumer Financial Protection Bureau and other legal issues.
Wells Fargo reached a $3.7 billion settlement with the bureau late last year that included a $1.7 billion fine over allegations the bank mistreated millions of customers, causing some to lose cars or homes. That was just the latest in a years-long series of costly penalties for Wells Fargo.
The firm remains under a Fed-imposed asset cap limiting it to its size at the end of 2017.
Meanwhile, the bank pulled in a record $13.4 billion in net interest income in the quarter, surpassing analyst expectations. The 45% rise from a year earlier shows the dramatic impact of the Federal Reserve’s interest rate increases on Wells Fargo’s bottom line.
Still, net income tumbled 50% to $2.9 billion, tied to the multibillion-dollar settlement.
“Though the quarter was significantly impacted by previously disclosed operating losses, our underlying performance reflected the progress we are making to improve returns,” CEO Charlie Scharf said in the statement.
Results included a $1 billion hit on equity securities, mostly in the firm’s affiliated venture capital business. Chief Financial Officer Mike Santomassimo said the loss was tied to enterprise software-related companies in the portfolio, but that the affiliate is “still a great business.”
Wells Fargo also set aside more than expected for potentially soured loans, further indicating a worsening economic outlook at one of the biggest U.S. lenders, even as it reaps the benefits from higher rates.
The firm took a $957 million provision for credit losses for the quarter, more than analysts expected.
The bank also provided an update on its so-called “reasonably possible losses” in excess of what it’s already set aside for legal issues, typically reserved for a regulatory filing after earnings.
The high end of the range as of Dec. 31 is about $1.4 billion, down from $3.7 billion at the end of the third quarter.
OFFSETTING REVENUE
Bank of America’s fourthquarter profits rose slightly from a year ago, as higher credit costs and potentially bad loans more than offset the bank’s sharp rise in interest revenue.
The bank said it earned a profit of $7.13 billion in the three months that ended Dec. 31, compared to a profit of $7.01 billion in the same period a year earlier.
Like its major competitors, Bank of America saw a sharp rise in interest income, helped by the Fed aggressively raising interest rates. Bank of America’s interest revenue was roughly $3 billion higher than it was in 2021.
But also like JPMorgan Chase and others, Bank of America saw a slowdown in its investment banking business and had to set aside more money to cover potentially bad loans.
The bank had $1.1 billion in credit reserves added this quarter; a year earlier, the bank released $500 million from that account.
DEALMAKING SLOWDOWN
JPMorgan Chase & Co. said its fourth-quarter profits rose 6% from a year ago, as higher interest rates helped the bank make up for a slowdown in dealmaking in its investment bank.
The bank also set aside more than $2 billion to cover potential bad loans and charge-offs in preparation for a possible recession.
JPMorgan said it earned $11.0 billion last quarter, up from $10.4 billion in the same period a year earlier.
The biggest driver of JPMorgan’s profits this quarter was higher interest rates. The bank, like its competition, has been helped considerably by the Fed lifting rates aggressively to combat inflation, as banks can charge more for loans.
JPMorgan’s net interest income was $20.3 billion, up 48% from a year earlier.
JPMorgan set aside $1.4 billion to cover potentially bad loans, and incurred roughly $900 million in charge-offs. The bank said it needed to set aside more money to cover bad loans because of “a modest deterioration” in the firm’s economic outlook.
Last year’s market decline hit JPMorgan’s investment bank particularly hard in the last quarter. The bank reported a 27% decline in profits in its corporate and investment bank, mostly caused by a more than 50% drop in investment banking fee revenues.
Dealmaking last year slowed considerably, as many companies chose to hold off any big moves due to the Fed’s rate increases.
For the full year, JPMorgan had revenue of $128.7 billion while profits fell 22% from 2021 to $37.7 billion. Most of the decline in JPMorgan’s full-year profits were tied to the higher credit costs the bank had to expense for the loan losses.