The major US Banks’ latest earnings reports painted a mixed picture to last year’s fourth quarter financial environment. Inflation, reduced investment deal-making, slowing consumer spending and preparations for recession including a mix of increasing reserves and provisions offered some good and bad surprises for investors.
In recent years, financial institutions have been among investors’ top favorites but it is less certain that things will stay this way. According to the latest eToro Retail Investor Beat survey, at the end of Q4 2022, 76% of Romanian investors owned assets in the financial services industry. However when asked how their portfolio will look in the next three months, only 73% declared that they will still own assets in the financial sector. The latest earnings reports of the major US banks are worrying investors due to steep increases in expenses and provisions and decreases in the profitability.
Goldman Sachs had a disappointing Q4, its earnings missing the Wall Street consensus of 5.95 dollars by a large margin. The earnings per share dropped to 3.32 dollars from 8.25 dollars in Q3 and from over 10 dollars in Q4 2021. The provisions for credit losses increased to 972 million dollars from 344 million one year ago. While revenue missed expectations, the compensation and benefits expenses increased to 3.76 billion from 3.25 billion dollars a year ago. The company is focusing on restructuring, and the headcount decreased by 600 people in the last quarter of 2022, wit reports showing that another 4000 people are to be fired. The share price lost 5% after the earnings reports but is still up 0.83% this year.
By contrast, JP Morgan posted very good figures, exceeding analysts expectations. The bank increased profits by 6% and had revenues of 35.57 billion dollars, compared to an estimate of 34.3 billion. Q4 EPS were 3.56 dollars, better than expected estimates of 3.1 dollars. But the provisions increased to 2.29 billion dollars from 1.29 billion a year ago, worrying investors. The stock price dropped 2% in premarket but is up 1.07% year to date.
Bank of America also showed very good Q4 results, reporting a 2% profit increase and an increase in revenues of 11% to $24.5 billion. BofA set aside 1.09 billion dollars in loan loss provisions for the quarter, up from 0.9 billion in the previous quarter. This raised concern for investors about the bank’s exposure in an expected recessionary environment and the share price dropped 2.6% but it is still up 0.6% year to date.
Goldman Sachs expects 2023 to be less turbulent for markets, with inflation moderating and major central banks approaching the end of their tightening cycles. A mild recession in 2023 is the base scenario for BofA with the consumer spending remaining strong but the pace slowing. JP Morgan sees the same mild recession but expects its revenues to be propped up by the credit cards spending. In November, consumer credit increased at a seasonally adjusted annual rate of 7.1%.
The latest consumer spending data published by the National Retail Federation showed consumer spending slowing. The inflation-adjusted retail sales slipped 1% in December, the second straight month of 1% declines. It also was the first holiday season since 2008 and before that, 2001, in which retail sales fell 1% or more in both November and December.
US banks were favored by high interest rates in Q4 last year. However, a lack of investment deal-making, increasing costs and recession preparations led to mixed results. With large loan loss reserves, the banks are better positioned for a recession scenario in 2023.
Market commentary by eToro analyst for Romania, Bogdan Maioreanu