The large Wall Street banks have experienced the sharp rise in interest rates in the United States at two speeds. They hastily passed it on their credits, but they dragged their feet on deposits and liabilities. Now, interest expenses are skyrocketing with a delayed effect and that has punished the accounts of the main entities in the first quarter of the year. Large banks have not particularly suffered from the rise in commercial real estate delinquencies, which puts more pressure on regional banks. Instead, they have had to make new contributions to the Federal Deposit Insurance Commission (FDIC) to finance the bailouts of Silicon Valley Bank and the rest of the mid-sized banks that failed last year. Meanwhile, investment banking commissions are recovering in the heat of the resurgence of IPOs, bond placements and corporate operations.
JPMorgan, Bank of America, Morgan Stanley, Citi, Goldman Sachs and Wells Fargo added profits of 34,442 million dollars (about 32,400 million euros) in the first three months of this year, 3% less than a year before. The largest bank in the United States, JPMorgan, continues to be the driver of results. It earned 13,419 million, 6% more than in the first quarter of 2023, but this increase was mainly due to the incorporation of First Republic Bank, which it bought at a bargain price last year. Without this operation, profit would only grow by 1%.
The president of JPMorgan, Jamie Dimon, spoke of a “normalization” of the interest margin and the cost of credit, which translates into a smaller difference between what the bank charges for loans and what it pays for deposits and others. Passives. The first quarter accounts reflect that interest income still grew by 28% year-on-year (partly due to higher volumes derived from the incorporation of First Republic Bank), but what is new is that interest expenses shot up by 49%. Furthermore, when quarters are compared sequentially, net interest income falls from the fourth quarter of last year to the first quarter of this year.
That normalization, Dimon said, will continue. This means a reduction in free deposits and a transfer to liabilities with a higher cost. The bank's chief financial officer, Jeremy Barnum, explained it in the conference with analysts: “We don't think it makes sense to assume that in a world where checking and savings accounts are paying zero and the official interest rate is above the 5% we are not going to see continuous migration,” he said.
The same effect is more noticeable in Wells Fargo accounts. Its interest income grew 18%, to $22.84 billion, but interest expenses soared 76%, to $10.213 billion. The entity attributes this to the impact of rising interest rates on financing costs, including the impact of customers migrating to higher-profit deposit products. With this, the interest margin was reduced by 8%, 12,227 million dollars, weighing down the income statement despite the improvement in commission income. Attributable consolidated profits also fell 8%, to $4,313 million.
The same happened with Bank of America, the second largest bank in the United States. With a similar volume of deposits, interest expense went from 4,314 to 9,138 million dollars in one year. As a whole, higher payments on liabilities weighed down the interest margin and contributed to a 20% drop in profit, to $6,142 million.
Citi suffered a 27% decline in profit. The entity's accounts are also marked by pressure on the interest margin, but not as much. It dominates its own restructuring and transition process, with severance expenses due to workforce reduction and lower income from the sale of businesses. Along with this, provisions for credit losses are growing strongly.
Improve investment banking
After a dark period in relation to the investment banking business, commission income and the profitability of that business are recovering. IPO activity has picked up and debt issuances have also skyrocketed. With this, this business is oxygenating the accounts of the greats of Wall Street. Income from investment banking commissions has skyrocketed by 30%.
That has especially benefited Goldman Sachs and Morgan Stanley, the most dependent on that business. Goldman shines in the three main chapters: commissions for placement and underwriting of share issues soar 45%, to $370 million; Those derived from debt issues rose 38%, to 699 million, and advisory fees rose 24%, to 1,011 million. In total, they grow by 32%, up to 2,080 million.
Thanks to investment banking and the activity of the trading desks, Goldman Sachs' profit has shot up 27% in the first quarter, to $3,931 million, surpassing Citi. In your case, the interest margin goes down, but it has little weight in your business.
The same goes for Morgan Stanley. Its profit grew by 15%, to 3,266 million dollars, due to the 16% increase in its investment banking income and the good evolution of the brokerage desks and wealth management.
Goldman surpasses JP Morgan in investment banking fees, which brought in $2,001 million, 21% more than the previous year. This was especially due to the increase in commissions for debt issues, which shot up 58%, up to 1,048 million. Shares also skyrocketed, 51%, to $355 million, while advisory services fell sharply, 21%, to $598 million.
Bank of America breaks down commissions differently, but it grows in all chapters, especially in issues. Altogether, their investment banking fees increase by 35%, up to $1,568 million. In the case of Citi, the trends are similar. Commissions on fixed-income and variable-income placements grew by around 60%, while insurance commissions fell by 17%. Overall, its investment banking fees rose 32% to $977 million. At Wells Fargo, investment banking fees soared 92%, to $627 million. The bank seeks to grow in that business, in which it is still relatively small.
Rescue bill
Banks continue to foot the bill for the 2023 bailouts of Silicon Valley Bank, Signature Bank and First Republic Bank. After the extraordinary provisions that punished the accounts at the end of 2023, the entities have had to provision new contributions again.
In the case of JPMorgan, the additional amount has been 725 million dollars and in that of Bank of America, the second largest bank, about 700 million. Wells Fargo has had to allocate 284 million, while Citi has reserved an additional 251 million. Goldman Sachs and Morgan Stanley, which have a smaller balance sheet and fewer guaranteed deposits, have only had to contribute an additional 78 and 42 million, respectively.
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