Bank Earnings Signal Dark Clouds Ahead

Wall Street’s biggest players have had a rough start to the year. All the biggest US banks saw negative profits in the first three months of 2022, ending a pandemic-era boom.

Citi, Goldman Sachs, Morgan Stanley and Wells Fargo all announced large year-over-year profit declines in their first-quarter earnings reports Thursday, joining JPMorgan Chase, which announced Wednesday that its first-quarter profit fell 42%. Citi saw a drop of 46%, Goldman Sachs fell 42%, Morgan Stanley dropped 11% and Wells Fargo fell 21%.

Since 2020, banks have benefited from the longest bull run in history, record-high trade volumes, surging bank deal values, low interest rates and big reserve releases driving profit spikes. Now executives are warning that the good times are coming to an end.

It was a turbulent quarter dominated by the devastating invasion of Ukraine,” Goldman Sachs CEO David Solomon said in his company’s release. “The rapidly evolving market environment had a significant effect on client activity as risk intermediation came to the fore and equity issuance came to a near standstill.”

Goldman earned $3.94 billion in the quarter, down from $6.84 billion a year ago. Still, earnings per share came in at $10.76, analysts had expected $8.89 per share, according to Refinitiv data.

The bank, Solomon said, did well by expanding its role in consumer banking, wealth and asset management where Goldman’s net revenue jumped 21% to $2.1 billion, aided largely by increased management fees and credit card balances.

Citi also prepared for big losses caused by geopolitical strife. The bank added $1.9 billion to its reserves in order to prepare for losses from Russia and the Ukraine war. The bank beat estimates, bringing in $2.02 per share, compared with forecasts for $1.43 per share.

Morgan Stanley beat earnings estimates and saw strong revenue from equity and fixed income. The bank outperformed Goldman Sachs in merger and acquisition advisories, but business was still down overall. Equity underwriting deal volumes fell 80% in the quarter for both Morgan Stanley and Goldman Sachs, according to Refinitiv data. Wells Fargo, meanwhile, also warned of economic headwinds on the horizon.

The internal indicators continue to point towards the strength of our customers’ financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth.

Mortgage loans at Wells Fargo fell 33% from a year ago as the Federal Reserve raised interest rates. The company beat earnings per share estimates, bringing in 88 cents per share, higher than the 80-cent estimate from Refinitiv, but didn’t live up to revenue estimates. The bank came in with $17.6 billion, short of the Refinitiv consensus of $17.8 billion.