"Rapid Market Environment Shift... Banks Must Manage Risks in Non-Interest Sectors"

US Big 4 Financial Groups' H1 Net Profit Plummets 33% YoY
Non-Interest Income Drops Sharply...Direct Hit from Recession Concerns
"Need to Prepare for Risks Such as Loan Expansion and SG&A Expense Management"

[Asia Economy Reporter Minwoo Lee] The four major U.S. financial groups posted somewhat lackluster results. Although interest income increased due to the rise in benchmark interest rates, the increase in loan loss provisions and the decrease in non-interest income are believed to have impacted the performance. Given that the favorable conditions that had driven earnings growth, such as high liquidity and a booming capital market, have sharply reversed within a year, it is analyzed that domestic banks also need to manage risks in the non-interest income sector going forward.

Four Major U.S. Financial Groups’ H1 Net Profit $45.9 Billion... Down 33% YoY

Source=Woori Financial Research Institute

On the 13th, Woori Financial Research Institute diagnosed this in its report titled "Analysis of the 2022 H1 Performance of the Four Major U.S. Financial Groups and Implications." According to Bloomberg and others, the combined net profit of the four major U.S. financial groups?JP Morgan Chase, Bank of America (BoA), Citi, and Wells Fargo?was $45.9 billion (approximately KRW 59.9546 trillion) in the first half of this year, a 33% decrease compared to the same period last year. The combined operating profit of the four groups also fell by 1.3% year-on-year to $180.8 billion. Interest income increased by 12.5% to $95.3 billion during the same period, supported by loan growth and rising interest rates, but non-interest income decreased by 13.3% to $85.5 billion due to a downturn in the investment banking (IB) market.

The increase in loan loss provisions and other credit costs also weighed on earnings. While there was a net reversal of $15.4 billion until the first half of last year, it shifted to a net provision of $4.9 billion in the first half of this year. This is attributed to growing concerns about an economic recession due to geopolitical risks related to Ukraine and intensifying global inflation. However, excluding the effect of credit costs, net profit was still down 4.1% year-on-year at $50.8 billion.

BoA Minimized Profit Decline by Increasing Loans and Cutting SG&A Expenses

Source=Woori Financial Research Institute

There were notable differences among the banks in detail. In particular, BoA minimized the contraction in net profit through proactive measures. Strong loan growth improved interest income (up 17.6%), offsetting the decline in non-interest income (down 8.2%), and after adjusting for credit cost effects, BoA was the only one among the four major financial groups to see an increase (0.5%) in net profit. The decline in return on assets (ROA) was also the smallest at 0.3 percentage points (P). As a result, the gap in total operating profit and net profit with the top-ranked JP Morgan Chase narrowed to 1.34 times and 1.27 times, respectively, compared to 1.42 times and 1.52 times in the same period last year.

Heehyun Son, lead researcher at Woori Financial Research Institute, explained, "BoA maximized the profit improvement effect from rising interest rates by reducing low-yield assets such as cash and deposits with other banks and expanding loans across all business divisions including personal, corporate, and wealth management (WM)." He added, "At the same time, BoA increased securities-related income by leveraging market volatility, minimizing the contraction in non-interest income compared to competitive profits."

Effective management of selling, general and administrative expenses (SG&A) also played a key role. Along with improved operating profit, BoA curbed the increase in SG&A expenses by reducing its branch network (down 7.3%), resulting in a 2.7 percentage point improvement in the cost-to-income ratio (CIR). Wells Fargo was the only bank to reduce SG&A expenses more than BoA. Researcher Son noted, "Wells Fargo reduced its workforce the most among the four major financial groups over the past year," adding, "It immediately cut staff in the mortgage sector, which showed poor performance."

Similar Conditions... Domestic Financial Firms Should Prepare in Advance

The first-half performance of U.S. financial groups showed a trend similar to that of domestic financial holding companies. Interest income increased, non-interest income decreased, and loan loss provisions also rose. The outlook is also similar. With the benchmark interest rate expected to remain elevated for some time, net interest margin (NIM) improvement is anticipated to continue.

The report emphasizes the need to respond swiftly to the rapidly changing environment, such as the sharp decline in liquidity and contraction of capital markets, as BoA did. Researcher Son stressed, "The cases of major U.S. financial groups experiencing deteriorated non-interest business performance in IB, venture capital (VC), and others due to unfavorable capital market conditions have significant implications for the domestic financial sector." He added, "It is essential to enhance risk management capabilities to prepare for market risk exposure associated with strengthening non-interest businesses, and recognize that cost reductions such as SG&A expenses can also serve as a means to defend profits."

This content was produced with the assistance of AI translation services.