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By Nicholas Larsen, International Banker
Given the swollen net interest margins (NIMs) that US banks enjoyed throughout much of 2023, one might reasonably have assumed that the year’s final-quarter earnings would reveal the same degree of riches being generated. And yet a decidedly mixed performance was reported for the October-December period, as a combination of key issues weighed on American lenders, including a plethora of one-off charges coming due, higher loan loss provisions (LLPs) being allocated and shrinking interest margins as banks began upping their payouts on deposits to draw customers away from high-yielding alternatives towards the end of the year.
Indeed, the bulk of the US banking sector experienced contractions in net interest margins, as the windfalls from the Federal Reserve’s (the Fed’s) sharp rate hikes that banks initially failed to pass on to depositors largely disappeared during the final quarter. “The results were not well taken,” Macrae Sykes, portfolio manager at Gabelli Funds, told Reuters on January 19. “The general theme is deteriorating credit, continuing pressure on net interest margins due to higher deposit costs and little loan growth. That’s why you’re seeing pressure on some of those banks today.”
Bank of America (BofA), for example, reported a 5-percent decline in net interest income (NII) to $13.9 billion, mostly due to higher deposit costs and lower deposit balances. The bank also underperformed vis-à-vis its US peers, such as JPMorgan Chase, due to its significantly larger exposures to low-yield, long-dated bonds purchased during the pandemic era, the values of which have since plummeted as interest rates and bond yields have skyrocketed.
The decline also permeated regional banks in the United States. KeyCorp, the parent company of Ohio-based Keybank, recorded a whopping 92-percent reduction in quarterly profits and estimated a contraction in net interest income of between 2 percent and 5 percent for 2024. Its loan portfolio at the end of the fourth quarter (Q4) was just shy of $114 billion, a hefty 3.2 percent lower than a year earlier, with KeyCorp’s chief executive officer, Christopher Gorman, attributing the underperformance to “muted” borrower appetite. “There is not a lot of loan demand; there are not a lot of transactions,” Gorman recently acknowledged to Reuters.
Virtually across the board, moreover, banks set aside more in Q4 to cover potential bad loans than analysts were expecting. Commercial-property loans have particularly faltered in the face of sluggish office-occupancy rates, as the post-pandemic trend of remote work and soaring borrowing costs stemming from the Fed’s interest-rate hikes have seriously dented office valuations. As such, major US lenders have been forced to write off hefty chunks of their commercial-property loan books.
Bank of America recorded a $1.1-billion provision for credit losses, $12 million higher than during the same quarter of the previous year. The US’ second-biggest bank also reported that its percentage of nonperforming office loans rose during the final quarter, despite around 75 percent of its total office-loan portfolio being backed by higher-quality buildings. $7.6 billion worth of the bank’s office loans will be maturing this year, in addition to a further $3.1 billion in 2025, with commercial-property loans representing 6.9 percent of its total loan value at the end of December.
At Wells Fargo, meanwhile, that figure is a much more sizeable 16 percent of total loans, with non-accrual office loans swelling to $3.4 billion at the end of December, around 21 percent more than at the end of last year’s third quarter and a whopping 1,727 percent more than the $186 million it posted a year ago. “As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remained weak,” Wells Fargo’s chief financial officer, Michael Santomassimo, confirmed on a call with investors. “While the charge-offs we took in the fourth quarter were contemplated in our allowance, we are still early in the cycle.”
The fourth quarter was also underwhelming as banks continued to account for the fallout from the US banking crisis that surfaced in March 2023. With the Federal Deposit Insurance Corporation (FDIC) having to spend around $23 billion to clean up the messes from the collapses of Silicon Valley Bank (SVB) and Signature Bank, it was left to the US’ biggest lenders to foot the bill. Indeed, the failure of First Republic Bank in May saw JPMorgan Chase intervene to acquire the bulk of its assets in a deal that required the US’ biggest bank to pay $10.6 billion to the FDIC and dole out $25 billion to First Republic’s creditor banks.
As such, JPMorgan reported a 15-percent decline in Q4 earnings, having paid a $2.9-billion fee to the FDIC tied to the seizures of failed regional banks last year that drove up its expenses. Wells Fargo experienced similarly elevated costs in the fourth quarter, spending $15.8 billion, including a $1.9-billion charge to the FDIC and $1.1 billion in severance expenses.
And Bank of America realised a $2.1-billion pretax “special assessment” fee to refill the FDIC’s coffers, which figured significantly in the bank’s fourth-quarter net-income decline to $3.1 billion (35 cents per share), well below the $7.1 billion (85 cents per share) it reported a year earlier. The bank also took an additional pretax charge of $1.6 billion during the quarter related to its shift away from the London Inter-Bank Offered Rate (LIBOR). “We reported solid fourth quarter and full-year results as all our businesses achieved strong organic growth, with record client activity and digital engagement,” Bank of America’s chief executive, Brian Moynihan, stated. “Our expense discipline allowed us to continue investing in growth initiatives. Strong capital and liquidity levels position us well to continue to deliver responsible growth in 2024.”
Citi paid several one-off charges during Q4, including a $1.7-billion payment to the FDIC and a $780-million charge tied to severance costs and other aspects of its ongoing restructuring programme. With a net loss of $1.8 billion posted, along with a net income of $9.2 billion (a whopping 38 percent lower than the $14.8 billion of Q4 2022), Citi was easily the worst performer among the US’ biggest lenders. Its sizeable exposures to Argentina’s debt market proved hugely damaging, with the new administration of President Javier Milei’s decision to devalue the country’s currency and slash public spending proving a major hurdle for the US’ third-biggest bank to continue servicing Argentina’s debt. Citi’s revenue also declined by 3 percent to $17.4 billion, with the peso devaluation wiping out $880 million from that total and also dragging down the bank’s total trading revenue by 19 percent to $3.4 billion as trading in bonds and other fixed-income securities plummeted by 25 percent. Citi confirmed that it had set aside reserves of $1.3 billion to account for risks tied not only to Argentina but also to Russia, which remains in conflict with Ukraine, thus leaving the bank vulnerable to “prolonged political and economic instability”, Citi stated.
“The fourth quarter was very clearly disappointing,” Citigroup’s chief executive officer, Jane Fraser, acknowledged. “We know that 2024 is critical.” The lender is set to undergo major restructuring over the coming year, shrinking its global workforce by 20,000 by 2026, or around 8 percent of its total staff, according to its chief financial officer, Mark Mason. The bank announced in November that the job cuts would also include several hundred senior-level staff.
As for the biggest US bank, JPMorgan Chase still performed well during the quarter despite the FDIC’s one-off charges, as annual net income ballooned to an all-time high for any US bank of $49.6 billion. Nonetheless, revenue and net income posted below what analysts had anticipated. “Our record results in 2023 reflect over-earning on both NII and credit, but we remain confident in our ability to continue to deliver very healthy returns even after they normalise,” the bank’s chief executive officer, Jamie Dimon, claimed after the bank’s earnings release. “Our balance sheet remained extremely strong, with a CET1 ratio of 15.0 percent, a staggering $514 billion of total loss-absorbing capacity and $1.4 trillion in cash and marketable securities.”
There also appears to be considerable optimism over the banking sector’s prospects for 2024. Goldman Sachs analyst Ryan Nash said he expected regional banks to enjoy a brighter outlook in 2024. “It’s clear that we are getting closer to the trough in net interest income, which should happen by the middle of the year.” Dimon, meanwhile, predicted the US economy would continue to show resilience “with consumers still spending, and markets currently expect a soft landing”. He did warn, however, that deficit spending and supply-chain adjustments “may lead inflation to be stickier and rates to be higher than markets expect”. Furthermore, the JPMorgan chief executive highlighted the “significant and somewhat unprecedented” risks to markets and economies that persist, such as the central banks’ efforts to curb support programmes and wars in Ukraine and the Middle East, which “cause us to remain cautious”.
