Updated January 15th, 2024 at 13:30 IST
Mega-banks menaced by closing jaws in murky waters
JPMorgan, Bank of America, Citigroup and Wells Fargo earnings reveal their squirming in rising bad debt.
- 2 min read
Pincer movement. Big U.S. banks are getting squeezed. Their stock prices have undershot the broader market over the past year, dogged by growing concerns ranging from interest rate cuts to profitability-sapping rule changes. Financial results unveiled on Friday by JPMorgan, Bank of America, Citigroup and Wells Fargo made clear they’re squirming in rising bad debt, a sea of aberrant charges and unpredictable changes in customer behavior. A quest for expenses to cut looks likely to become a preoccupation.
Last year’s arc was simple enough: lending rates increased, but so did the amount depositors wanted for their savings. Curiously low default rates through the pandemic also inched up. At the end of 2023, however, such trends were drowned out by accounting white noise. Bank of America took a $1.6 billion charge from quitting an index used to price lending agreements. Citi suffered from the plunge in Argentina’s peso. The four mega-banks took a combined $8.6 billion hit from regulators to cover the failures of mid-sized lenders.
The quartet agree that creditworthiness is slipping. Credit card delinquency picked up as did writedowns of loans backed by commercial real estate. So far, these items are more nuisance than menace. Bank of America indicated $107 million of office property loans would be uncollectible, but that compares to a portfolio of $18 billion. Citi, a powerhouse in credit cards, said 3.8% of loans went bad, compared with 2.2% a year ago; it also has set aside enough profit to cover more than twice the current level. Where those numbers go next depends largely on the U.S. Federal Reserve and employers, both of which have stoked great debate.
With so much up in the air, bank bosses will be under greater pressure to focus on the handles they can pull. The main one is costs. All four lenders shared one disconcerting feature from October through December: revenue failed to grow more quickly than expenses, even ignoring the various one-offs. At Bank of America, the gap was 5%; at Citi it was 8%.
Getting those “jaws” to swing to the positive will be difficult. Factors that drive up costs, such as paying staff and buying technology, show no signs of reversing. Citi boss Jane Fraser has already found 20,000 employees to jettison by 2026. Her peers are destined for similar exercises.
Published January 12th, 2024 at 22:59 IST