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Profits of the big US banks fell in the fourth quarter of 2022

  • As they try to deal with high interest rates and delinquencies, investment and consumer banks are struggling to stay healthy.

During most of the pandemic, the profits of the large investment and consumer banks in the United States remained at very high levels. Shareholders enjoyed juicy returns during this period and a high valuation of their assets.

But, as experts point out, the profits of the largest banks are generally a product of the ups and downs of the economy in which they operate. So in a prosperous economy the demand for loans skyrockets.

On the other hand, if the economy slows down, said demand falls and banks must have sufficient provisions to face the lean period. Often many loans cannot be collected and cause losses to financial institutions.

However, banks manage to make a profit whatever the scenario. In times of uncertainty and volatility, investment banks manage their trading businesses better.

Whereas when the economy is stable and healthy, their best income is derived from the advisory services they provide. Bank managers, then, must identify opportunities and try to balance their business with the pace of the economy.

Pessimistic results for the fourth quarter

Since the beginning of 2020, the US economy has gone through periods of high volatility. The shutdown caused by the pandemic, the huge endemic stimuli that sent a mountain of dollars onto the streets and the subsequent increase in interest rates.

In each of these periods, the economy has been on a roller coaster. The high volatility in the last three years has tested the performance of bank executives. Sometimes to rub your hands and other times to put your hands to your head.

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In the last quarter of 2022 and throughout last year the results exhibited since last week by Bank of America, Goldman SachsCitigroup, JPMorgan Chase, Wells Fargo and Morgan Stanley, were less optimistic.

Year-over-year profits for the six largest US banks fell 20% in the fourth quarter of 2022 compared to the same period in 2021. They fell from $34 billion that year to about $27 billion last year. .

It’s just that some banks suffered more than others. While JPMorgan’s earnings and Bank of America’s saw a modest rise, Goldman Sachs’s plummeted as it sank by two-thirds.

Apparently, such disparity is due to the different strengths of each of these banking institutions. For example, when interest rates rise JPMorgan and Bank of America often do better because of their customers’ consumption.

When interest rates rise, the difference (spread) between passive rates (what savers earn) and active rates (the profit banks obtain from loans) also increases.

Cash reserves to meet losses

In 2022, the net interest income of the six largest banks increased from the end of 2021 to 2022, from $17 billion to $66 billion.

With interest rates at historic levels, bank customers (individuals and companies) will find it more difficult to pay off their debts. Therefore, banks are obliged to set aside money to offset the losses generated by credits.

As interest rates began to rise, banks had to set aside approximately $7.2 billion to cover this shortfall in the fourth quarter of last year.

The CEO of Bank of America, Brian Moynihan and the head of JPMorgan, Jamie Dimon, have predicted that this year the US economy will enter a slight recession due to the high interest rates of the Federal Reserve.

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However, that hasn’t stopped interest rates from helping banks get higher returns on their money, too. At least until now.

Stock market crash dragged down investment banks

Behind the stock markets crash since last year, the income of investment banks has of course also fallen. For Goldman Sachs and Morgan Stanley, such a drop represented a 50% loss in earnings.

However, the difference between the profits obtained by investment banks and consumer banks cannot be explained simply by the performance of each of these financial companies.

Morgan Stanley’s earnings related to non-investment banking businesses outperformed Goldman’s. Whereas Wells Fargo again had a bad quarter, despite being a large consumer bank.

Its profits were cut in half from levels a year ago. Regulatory problems weighed heavily on Wells. The bank had to pay a massive $1.7 billion fine after being sanctioned by the Consumer Financial Protection Bureau.

The bank was accused of mismanaging several billion dollars of its clients’ accounts.

Goldman’s diversification efforts failed

On the other hand, there is the case of Goldman, which tried to set up a consumer bank to diversify its business. The problem is that he has had to set aside large amounts of money to cover bad loans in that department. He has now reduced efforts in that area since the business went bad.

When consulted, the head of the bank, David Solomon, said that the company had made a great effort in a short time, without having the necessary talent, to achieve the business objectives set.

A week before, the firm laid off 6.5% of its staff. Something that almost all companies are currently doing to try to reduce their costs and in view of their prospects for lower growth this year.

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In recent years, other large banks in the country have also had to navigate similar internal crises. This type of situation only highlights how the banking business has changed and how well these companies have been managed.

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