Bank Tracker: Earnings Bellwethers, ESG, Crypto, M&A, Wealth

Useful Read-Throughs from Bellwethers

Day 1 of 2Q23 earnings season. Earnings season kicked off Friday with releases from several bellwether financials: JP Morgan Chase, Citigroup, Wells Fargo, and State Street among banks, as well as BlackRock. In this report we review read-throughs for the financials based on this first tranche of data and management commentary.

Jamie Dimon summed up macro puts and takes very well on JP Morgan Chase’s earnings call:

“The consumer is in good shape, they're spending down their excess cash; that's all tailwinds there. Even if we go into recession, we're going with rather good conditions, low borrowings and good house price values still. But the headwinds are substantial and somewhat unprecedented. There's war in Ukraine, oil gas [sic], quantitative tightening, unprecedented fiscal needs of governments, QT which we never experienced before. And I just think people should take a deep breath on that. We don't know if those things could put us in a soft landing, a mild recession or a hard recession.”

The effect of interest rates on deposits and other cash vehicles is creating headwinds for each of these firms in various ways but, broadly, BlackRock and State Street are continuing to execute on secular capital markets opportunities while the universal banks are hedging their bets, in the face of both the macro uncertainty described by Jamie Dimon and the post-crisis regulatory uncertainty.

ESG and crypto: The dogs that didn’t bark. ESG and crypto are two topics which are orthogonal to most financial sector business lines but have tended to generate a great deal of commentary. Crypto commentary has of course sharply dropped off since the end of the 2021 bull market, but Bitcoin is up sharply in 2023 and BlackRock CEO Larry Fink has made several blockchain-related comments recently. On this quarter’s initial earnings calls, both topics were a bit conspicuous by their absence. Nobody mentioned crypto (or any variant such as tokenization), nor did anyone mention ESG directly. However, while Mr. Fink has forsworn use of the term “ESG,” he did make some very bullish comments about energy transition:

“I think transition investing is probably one of the greatest opportunities in the world today. The dialogues that we're having with governments worldwide are very unique. There's not a government that is not focused on this, especially for countries that are dependent on importation of power. They're all looking for different ways across the board in terms of how do they successfully navigate their economy and energy, and power is becoming one of the dominant conversations. And then, through the United States IRA, we are seeing just huge interest with US and non-US companies coming into the United States and take advantage of the opportunities that present to us in terms of elevated returns because of the IRA. And so, we look at this as a multi-multiyear growth opportunity… we're talking tens and tens of trillions of dollars of market opportunity.”

Investment banking mixed: M&A weak, underwriting outlook guardedly optimistic, some targeted hiring. Investment banking fees were down except at Wells Fargo, the smallest of the group. Unsurprisingly, M&A was especially weak, though underwriting fees were generally up. JP Morgan and Citigroup offered somewhat encouraging outlooks away from M&A, and Citigroup and Wells Fargo each highlighted specific investments in personnel.

On Citigroup’s earnings call, CEO Jane Fraser noted that “heightened macro uncertainty continued to impact client activity,” while also pointing out that “we continue to have a strong pipeline and are seeing green shoots of activity,” and “a lot of pent-up demand for M&A but it's hard to predict when that pipeline will unlock.” She also highlighted targeted hiring amid broader layoffs: “We continue to right-size the business through the environment whilst making investments in selected areas such as technology and healthcare.”

JP Morgan Chase CFO Jeremy Barnum struck a cautiously optimistic tone on underwriting though not on M&A: “Underwriting fees were down 6% for debt and up 30% for equity with more positive momentum in the last month of the quarter. In terms of the second half outlook, we have seen encouraging signs of activity in capital markets, and July should be a good indicator for the remainder of the year. However, year-to-date announced M&A is down significantly which will be a headwind.”

Wells Fargo CEO Charlie Scharf also highlighted targeted hiring “in priority growth areas, including a Co-Head of Global Mergers and Acquisitions, Co-Head of Financial Institutions, and new Heads of Financial Sponsors, Equity Capital Markets, Healthcare and Technology, Media and Telecom.”

Wealth. Wealth management client assets rose across the board, though JP Morgan Chase’s outsized increase is largely a function of the First Republic acquisition. JP Morgan’s advisor total, including the Private Bank, rose 1% during the quarter as well. None of the wirehouses report advisor totals anymore, but Citigroup CFO Mark Mason did note a 1% decline “reflecting the re-pacing of strategic hiring.” Wealth segment revenues at the large banks remain under pressure from the effect of rising rates on client deposits, though at Citigroup, mortgage lending drove Wealth at Work revenues up by over 30%.

Citigroup noted strong referrals and customer acquisition. The bank has generated “about 25,000” wealth referrals from retail branches year to date, and in the second quarter, "new client acquisitions were up nearly 40% in the Private Bank and approximately 60% in Wealth at Work.”

ETFs: SPY drove State Street flows, BlackRock looking past passive equities. The two largest (publicly held) ETF managers reported as well. State Street inflows of $27 billion were largely driven by $20 billion of flows into SPY. At BlackRock, $35 billion of fixed income flows accounted for the lion’s share of total ETF flows. On the call, CEO Larry Fink reiterated the firm’s goal of more than tripling fixed income ETF AUM to $2.5 trillion by 2030, and also highlighted growth in active ETFs, noting two such launches in May.

Consumer crosscurrents. Consumer banking results were somewhat mixed, reflecting current consumer strength amid heightened macro uncertainty. Credit card spend was strong at all three large card issuers (though balances were of course down seasonally). Credit quality continues to incrementally deteriorate, but it remains at a level and pace that continue to suggest post-COVID normalization rather than cyclical downturn.

Weekly Federal Reserve Balances

July 12 Federal Reserve balances remain stable. BTFP usage rose 0.3% last week but total bank borrowings (combined with those from the Discount Window) declined 0.3%. While the $105 billion total remains elevated relative to pre-crisis levels, it has at least remained flatting for several weeks now. Money market fund balances have similarly stabilized. Bank deposits increased last week, however, at both large and small banks.

Interest Rates

Higher-longer expectations are negatives for margins and credit quality. As Figures 17 - 20 show, the yield curve remains inverted, the 2-10 spread is off its lows but remains at remarkable levels, and Fed Funds futures imply an additional rate hike in July, with no easing expected until March 2024.

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