"Tightening Seen as Short-Term Positive" US Big 4 Banks' Earnings Surprise... Only Goldman Sachs Underperforms

by Cho Seulkina

Published 19 Apr.2023 02:46(KST)

Major U.S. banks posted earnings surprises despite high-intensity tightening and a small bank crisis triggered by Silicon Valley Bank (SVB). The Federal Reserve's (Fed) consecutive interest rate hikes actually led to a sharp increase in net interest income, showing that tightening acted as a short-term positive factor. Among the major banks that have disclosed their results so far, only Goldman Sachs, which focuses on investment banking, was directly hit.

Bank of America (BoA), the second-largest bank in the U.S., announced on the 18th (local time) that its first-quarter earnings per share (EPS) stood at $0.94, far exceeding Wall Street's estimate of $0.82. First-quarter revenue was $26.39 billion, surpassing the expected $25.13 billion. This represents a 13% increase compared to the same period last year. Net income for the same period rose 15% to $8.16 billion.

Brian Moynihan, BoA's Chief Executive Officer (CEO), stated in a press release, "All business segments performed well," and added, "It shows how over a decade of responsible growth efforts in a changing economic environment has helped provide stability." He also mentioned that the balance sheet was further strengthened and strong liquidity was maintained.

[Image source=AP Yonhap News]

With this, all four major U.S. banks recorded earnings surprises. Earlier, JP Morgan Chase, Citigroup, and Wells Fargo also posted results far exceeding Wall Street expectations. The largest bank, JP Morgan, reported an EPS of $4.10, significantly beating the forecast of $3.41. Net income surged by a whopping 52% compared to a year ago. Citigroup and Wells Fargo also delivered better-than-expected results.

The primary reason behind these strong performances is the improvement in net interest margin due to the Fed's rapid interest rate hikes. The widening gap between lending rates and deposit rates, known as the net interest margin, expanded, increasing interest-related income. BoA reported that net interest income surged 25% year-over-year to $14.4 billion. Additionally, the collapse of SVB and Signature Bank last month led regional small bank customers to move deposits to large banks, providing a secondary benefit. In JP Morgan's case, customers, unsettled by the SVB crisis, transferred deposits en masse, increasing deposits by $37 billion as of the end of March compared to December of last year.

On the other hand, investment bank Goldman Sachs disclosed disappointing results. Goldman Sachs' first-quarter net income fell 18% year-over-year to $3.23 billion. It was the only major bank to report a decline in first-quarter net income so far. Revenue also dropped 5% year-over-year to $12.22 billion, falling short of market expectations of $12.76 billion.

Market analysts attribute this to Goldman Sachs, which focuses on Wall Street investment banking, not benefiting from the interest rate hike effects or the secondary gains from small bank deposit outflows, unlike the four major banks with higher retail banking proportions. Instead, the contraction in financial markets severely impacted initial public offerings (IPOs), bond issuance, and bond and stock trading. Goldman Sachs' bond trading revenue fell 17%, and investment banking revenue dropped 26%. Additionally, during the partial sale of the retail banking segment 'Marcus' loan portfolio, a loss of $470 million was incurred. As of the end of the quarter, Goldman Sachs' deposit balance was at its lowest level since the fourth quarter of 2021.

Currently, despite the earnings surprises from the four major banks, caution is rising in the banking sector. The high interest rates, which triggered the SVB crisis, are expected to continue acting as a financial stress factor. Concerns about credit tightening and economic recession are also mounting. Jamie Dimon, chairman of JP Morgan Chase, known as the "Emperor of Wall Street," warned right after the earnings announcement last week that "there is a need to prepare for the risk that higher interest rates will persist for a long time." On the same day, CEO Moynihan also predicted a possible recession in the third quarter.

The Wall Street Journal (WSJ) reported, "Banks hoped for a rebound in the global IPO market in the first quarter, but there are no signs of that yet," adding, "Global IPO activity in the first quarter was the lowest since the second quarter of 2020." The publication also noted that the net interest margin, which served as a major revenue source for large banks in the first quarter, is expected to decline due to interest rate competition among banks. Furthermore, it predicted that deposits in the banking sector will continue to move toward short-term financial products such as money market funds (MMFs).