Investment

Investment banks are struggling in a high-interest-rate world

Published

2 years ago

January 17, 2023

Shareholders like profits: a steady stream of income they can count on, quarter after quarter. The earnings America’s biggest banks make, however, are often pushed around by the volatility of the economy they serve. If the economy accelerates, demand for loans takes off; if it slows, bankers must set aside provisions for bad loans. Investment banks’ trading businesses tend to do well in times of volatility and uncertainty, but their advisory services sell best when markets are healthy and stable. Bank bosses must try to balance their exposure to these forces.

The past three years, in which the American economy has experienced a pandemic-induced shutdown, a financial boom and a rate shock, have been unusually volatile. As a result, the period has been an interesting test of how successful bank bosses have been in their efforts to balance their businesses’ performance. The results were on display between January 13th and 17th as Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, reported fourth quarter and full-year earnings.

Altogether profits at the six banks fell by 20% from $34bn in the fourth quarter of 2021 to around $27bn in the same period of 2022—but the pain was not evenly spread. Earnings at JPMorgan and Bank of America were up a little. Meanwhile, at Goldman Sachs they were down by two-thirds. Some of this divergence can be explained by their different strengths. Firms with big consumer banks, such as Bank of America and JPMorgan, typically do well when interest rates jump. Rising rates tend to increase the difference between what banks pay out on deposits and earn on loans. Net interest income, as this gap is called, zoomed higher in 2022 (see chart). It climbed by $17bn between the end of 2021 and 2022 across the big six banks, to $66bn.

This increase is partly offset by the fact that higher interest rates will make it harder for consumers and companies to pay back debts. Banks also set aside some $7.2bn for loan losses in the fourth quarter of 2022. Jamie Dimon, boss of JPMorgan, and Brian Moynihan, boss of Bank of America, both predicted a mild recession in America this year. Yet the net effect of higher interest rates on profits remains positive for now.

Investment-bank revenues, which slump when stockmarkets do badly, dropped by around 50% at Goldman and Morgan Stanley. But divergence in profits cannot simply be explained by the differing performance of investment and consumer banks. For one thing, profits at Morgan Stanley, where non-investment-bank businesses still did well, dropped far less sharply than at Goldman. For another, Wells Fargo delivered another bleak quarter, despite its big consumer bank, with profits half their level a year ago. The pain at Wells can be explained by regulatory troubles. In December the bank agreed to pay an enormous fine of $1.7bn to the consumer financial-protection bureau, having improperly managed millions of consumer accounts.

It is harder to explain the situation at Goldman. The firm sought to build a consumer bank, in part to diversify its business. But it has had to set aside unusually high provisions for loan losses in that department, and is now scaling back its efforts. “What went wrong?” asked one analyst on the Goldman earnings call on January 17th. David Solomon, the bank’s boss, argued the firm had tried to do too much, too fast and had lacked the talent to pull off some of its wide-ranging ambitions. Six days earlier the company had sacked 6.5% of its workforce. America’s big banks have all faced the same enormous economic shocks in recent years. These have revealed how different they have become—and how well they have been managed. ■

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

1 week ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

2 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

Published

1 month ago

August 5, 2024

Harry Miller

The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.