Stock market vigor has been unexpectedly bolstered by robust quarterly results from America’s preeminent banks, confounding analysts who, merely a week prior, forecasted a 10% profit dip for the nation’s six largest financial institutions. On Tuesday, Bank of America (BofA) revealed a 15% increase in after-tax profits, amounting to $8.2 billion between January and March, aligning itself with its contemporaries’ financial performances.
America’s largest private bank, J.P. Morgan, experienced a staggering 52% quarterly net profit growth, reaching $12.6 billion, while Citigroup, the nation’s third-largest bank, witnessed a 7% increase, equating to $4.6 billion. Nevertheless, the current reporting season has seen investment titan Goldman Sachs underperform, registering a 19% decline in quarterly profit to $3.09 billion. The bank cited Dealogic data indicating its sustained dominance in merger and acquisition advisory services over the past year, but acknowledged the scarcity of recent transactions. In the first quarter of 2023, investment banking fee income plunged 26% to $1.6 billion, with bond, currency, and commodities trading revenues dipping 17% to $3.9 billion. Conversely, the firm’s fund and asset management revenues soared by 26% to $3.2 billion.
Goldman’s capital markets division generated $8.4 billion in revenue, constituting the majority of the bank’s $12.2 billion total revenue in Q1 2023. However, as rival Morgan Stanley’s results indicate, fund and wealth management may emerge as a secondary core business for Goldman, supplementing its investment banking prowess. The Marcus retail banking venture has yet to yield significant success, despite a partnership with Apple. The tech giant is presently pursuing US deposits with an aggressive 4.15% interest rate offering.
Bank of America, much like its investment banking contemporaries, experienced a 20% decline in fee income to $1.2 billion in Q1 2023. However, the bank, along with J.P. Morgan and Citigroup, benefited immensely from the Federal Reserve’s rate hikes. The Fed’s target overnight rate soared from 0 to 0.25 in March 2022 to between 4.75 and 5.0 percent today. Notably, US banks have only passed along 30% of this hike to customers’ time deposits, according to J.P. Morgan analysts. The Federal Deposit Insurance Corporation (FDIC) data indicates that the average interest rate on US savings accounts was recently 0.37%, with interest checking accounts at an even lower 0.31%.
In contrast, banks are lending at a minimum rate of 3.5%, mirroring the yield on the virtually risk-free ten-year US government bond. This heightened margin between loan and deposit interest rates (“net interest income”) has invigorated the earnings of major US banks. Bank of America reported a 25% increase in net interest income to $14.4 billion, while J.P. Morgan posted an even more impressive 52% growth. Net interest income accounts for 55% of BofA’s total revenue.
Curiously, despite the collapses of Silicon Valley Bank and Signature Bank in March, which led customers to withdraw deposits from regional institutions, major US banks have only experienced marginal benefits. Money market funds emerged as the primary beneficiary, while higher living costs have compelled Americans to dip into their savings. Since December 2022, the US banking system has lost over $600 billion in deposits, according to Federal Reserve data, with regional banks losing around $249 billion and the top 25 banks losing $157 billion in March.
Future stress factors for banks include deposit shrinkage, potential loan defaults due to a possible economic contraction in the latter half of 2023, and higher interest rates that render real estate financing more susceptible to default. Nevertheless, BofA set aside a mere $901 million for loan loss provisions in Q1, less than the previous year, while Goldman managed to release some provisions earmarked for Marcus.