Early signs from the US are that banks – despite gyrating stock markets, signs of an economic slowdown, and concerns about deteriorating credit quality – are in rude health.
The four biggest – Citigroup, JP Morgan, Wells Fargo and Bank of America – all gave positive Q4 and full year pictures when they reported last week. The picture at the stand-alone investment banks, Goldman and Morgan Stanley, was mixed but that’s a different story.
First up was Citi, which on this occasion beat JPMorgan to be first out with its figures. Profit beat expectations, assisted by lower costs and a lower tax charge, with revenues 2% higher than the previous year.
This was encouraging as CEO Michael Corbat in November warned that progression towards its cost-income ratio target wouldn’t be met in 2018, and the shares got battered at the time.
In the event, the cost to income ratio fell 0.87% to 57.4%. This was not the 1% aimed for but was nevertheless a decent outcome and there is hope for further improvement in 2019.
FICC (Fixed Income, Currencies and Commodities) revenues disappointed last quarter, as corporates delayed debt refinancings, but Citi’s equity traders went some way to making up for this. Better equity trading and weak FICC was a feature across all the banks in Q4.
A blow up in November with one of its hedge fund clients that lost money on foreign exchange trades saw provisions of $180m. While that highlights the risks of the activity, over the long term this has been a big growth area for the US banks.
Citi’s consumer bank made record profits of $6bn, assisted by four rate hikes. Return on equity was 10.9%. Citi hopes to improve this to 12% in 2019 and 13.5% in 2020.
According to Corbat, the biggest danger at present is that the US will ‘talk itself into a recession’. The recent bounce in the stock market may help to avert that.
Next up was JP Morgan, which announced a stonking $32.5bn in annual profits for 2018. Good performances across all divisions (ex FICC) were behind this.
JPM used to be a solid but slightly dull entity, but over the past 20 years has become the yardstick for innovation and growth in the banking sector. It had an upset in 2011 when a rogue trader called the ‘London Whale’ managed to lose $6bn. But generally, the bank has controlled risks well while growing at a strong pace over the past ten years.
Next up was Wells Fargo. Wells has had a few more ‘issues’ than the others recently and was the most disappointing of the four. Loan growth fell (compared to 4% growth at the other three), partly due to the ‘asset cap’ that was placed on the firm a year ago as a result of misselling practices some years ago.
Finally, we heard from Bank of America. Group revenues were up 11%, with consumer revenues up 10% (BOA reports that American consumer spending grew 8.5% in 2018 and that this momentum continued into 2018). It added that there are no credit problems on the near horizon. Net income rose 39% over the previous year to about $30bn.
Lending margins rose 10bps in the quarter, and the bank believes that interest revenues can grow in 2019 even without further Fed hikes.
The main takeaway for me was the clampdown on costs, in particular wages. Profits at Wall Street banks were up 28% to over $100bn in 2018, but compensation rose just 1.8%. Perhaps the ‘Masters of the Universe’, as investment bankers are known, is finally being cut down to size.
Beyond that, last week reinforced how the US banks have cracked the investment banking business. The objectives are to provide a service at a reasonable price, pay staff well but not too well, and produce returns that cover the capital charge. It sounds easy, but it’s not something that the European banks have managed to achieve in recent years.
Overall, the banks had a good end to 2018, assisted by a buoyant economy it has to be said.
European counterparts must wish that they could operate against a similarly strong background.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.