New york, frankfurt for months, the mix of energy crisis, high inflation, looming recession and war worries left european banks' balance sheets almost untouched. Now american big banks have prepared themselves more clearly than before for an economic slump, sending a warning signal to europe.
That's because provisioning for potentially bursting loans was a major contributor to the outright plunge in net profits at major U.S. Institutions in the third quarter: JP morgan's net income was down 17 percent, while citi's was down 25 percent, morgan stanley's 29 percent and wells fargo's 31 percent.
Although the industry benefits from rising interest rates, especially in the USA. On the other hand, a lot of income from investment banking was lost. And tighter monetary policy, which allows for higher interest income, is also causing discomfort. The u.S. Federal reserve (fed) is raising interest rates faster than it has in a long time to fight inflation.
The prime rate now ranges from three to 3.25 percent and could be raised by a further 0.75 percentage points at the next meeting at the beginning of november. There is growing concern among bank managers and economists that the fed will plunge the u.S. Economy into recession with its tough interest rate policy.
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Then loan defaults would also rise, JP morgan CEO jamie dimon suggested. Consumers and companies are still in good shape. Consumers, a key driver of the U.S. Economy, "are spending 10 percent more than last year and 30 percent more than before the pandemic," dimon told analysts. Yet he fears a "hurricane" on the horizon. "With inflation, rising prime and mortgage rates, volatile markets and the war, this will weigh on future earnings," he clarified.
The head of the largest U.S. Money house warns of a "hurricane" on the horizon: "inflation, rising prime and mortgage rates, volatile markets and the war. That will have a negative impact on future results," he said.
The institution's equity ratio was 12.5 percent and is expected to be 13 percent in the first quarter of 2023. The bank launched a share buyback program to strengthen equity capital. "We hope to be able to restart our buybacks at the beginning of next year," dimon emphasized.
Mixed signals for europe's banks
The quarterly results thus send mixed signals to the european banks, which will only be presenting figures in the coming weeks. The rising interest income made possible by the interest rate hikes by the european central bank (ECB) and the u.S. Federal reserve (fed) should be good news for institutions. Because the ECB has also been raising its lending rates again since the summer. Top european bankers repeatedly point out that companies in europe finance themselves more than in the USA through bank loans instead of the capital market.
In times of economic downturn, however, credit institutions are threatened by higher burdens from bursting loans. This scenario is also feared by U.S. Financial institutions: the major bank JP morgan, for example, built up more reserves for this risk in the third quarter by increasing its risk provisioning for defaulting loans by a total of 808 million dollars. By way of comparison: a year earlier, the bank had been able to release 2.1 billion dollars in risk provisions it had formed for the consequences of the corona pandemic. The release of these funds had additionally driven profits at the time.
From july to september of this year, competitor wells fargo also recognized additional provisions in the amount of 784 million dollars. "We expect a steady increase in payment defaults and ultimately credit losses, only the timing remains unclear," said group CEO charlie scharf. Citi increased its risk provisioning by 370 million dollars.
In europe, too, institutions are preparing for an economic slump – making a necessary increase in risk reserves more likely. "We will not be able to escape a recession in 2023," said deutsche bank chief christian sewing in his role as president of the federal association of german banks (bdb) in washington on the sidelines of the annual meeting of the international monetary fund and the world bank. He also predicted more insolvencies in the coming months.
The gloomy outlook is also making european bank supervisors nervous. "So far, the favorable interest rate environment has been good for banks, but they must remain vigilant with regard to developments in the risk outlook," said the head of the ECB's banking supervision andrea enria at a recent meeting in vienna. He wants banks to consider possible credit risks early on and deal with them proactively.
Steven maijoor, the dutch representative on the ECB's supervisory board, was even more explicit: european banks should hold back on dividends and share buybacks in order to retain sufficient reserves for the expected economic downturn, he warned in an interview with the bloomberg news agency published on friday.
Bank representatives such as sewing or karolin schriever, a member of the board of the german savings banks and giro association (DSGV), on the other hand, are calling for politicians and supervisory authorities to relax certain regulations so that banks can grant more loans with their existing equity capital.
Investment bankers are the big losers
The quarterly results of the US giants also mark a turning point in the balance of power between "wall street," i.E. Investment banking, and "main street," i.E. The traditional banking business. Last year, investment bankers were still the stars of wall street. Now they are the big losers. For in addition to rising provisions, the largely idle mergers & acquisitions (M&A) business was the second major factor weighing on the results of US banks.
Last year's M&A boom helped make 2021 one of the most profitable years ever for the big wall-street houses. In the current year, however, rising interest rates, geopolitical risks and fears of a global economic crisis have caused a slump in M&A business. "Investment banking has been the business most negatively impacted by the economic environment, with a lower appetite for mergers and acquisitions," said citigroup chief executive jane fraser.
Largest u.S. Bank's investment banking revenue down 47 percent from previous year.
The hope that this business segment might recover in the second half of the year has not materialized, as the figures for the third quarter show. Investment banking revenue fell 47 percent at america's largest bank, JP morgan chase, 55 percent at morgan stanley and 64 percent at citi. At citi, the slump in M&A deals meant that net profit for the period from july to september also fell by almost a quarter to 3.5 billion dollars compared with the previous year.
This development is also a bad omen for european banks with large capital markets businesses, such as deutsche bank. However, at germany's largest financial institution, income from bond and foreign exchange trading has traditionally played a far more important role than income from ipos or merger advisory services. And in bond trading in particular, earnings at the major american banks JP morgan, morgan stanley and citigroup have bubbled up even more than in the previous year.
JP morgan shares win, morgan stanley loses
Investors, however, were not impressed by the setbacks in the third quarter. The shares of JP morgan, citi and wells fargo rose after the results were presented. Because despite lower profits, at least JP morgan, citi and wells fargo exceeded analysts' expectations. This was also due to the fact that the institutions were able to partially compensate for the slump in investment banking in other areas.
JP morgan and citi generated higher interest surpluses thanks to their large retail banking business. Gerard cassidy, an analyst at RBC capital markets, expects institutions to "continue to benefit from high interest rates and rising demand for credit throughout the first half of 2023".
At JP morgan, net interest income rose by 34 percent to $17.6 billion compared to the previous year's quarter – a new record. Annualized interest surplus could be $61.5 billion, bank says – $3.5 billion higher than initially estimated.
"JP morgan's results were surprisingly good," praised octavio marenzi of capital markets consultancy opimas. The 17 percent decline in net profit was mainly due to higher risk provisioning, he said. "If you take that out, profits are at the previous year's level." Sales increased by ten percent thanks to rising lending rates.
Morgan stanley, on the other hand, started to expand its asset management business after the financial crisis in order to ensure a more stable flow of income. Asset management revenue increased by three percent in the quarter and contributed almost half of the group's total revenue. Nevertheless, the share lost value on friday. While company CEO james gorman rated his company's performance as "robust and balanced in an uncertain and difficult environment". Analysts, however, had hoped for a better earnings situation.