Major US Banks Have A Major Week

Major US Banks Have A Major Week

about 4 years ago3 mins

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Major US banks reported fourth-quarter results this week – and while several deposited record revenue and profit in investors’ laps, others withdrew in the face of falling interest rates and legal troubles.

🕰️ Recap

  • The Federal Reserve lowered US interest rates three times last year
  • On Tuesday, JPMorgan Chase reported the highest annual profit of any US bank ever
  • Goldman Sachs and Bank of America, on the other hand, reported mixed fourth-quarter results on Wednesday
  • But on Thursday, Morgan Stanley wrapped banks’ earnings with a record year of its own

🔗 Connecting The Dots

In their third-quarter reporting three months ago, banks cautioned investors that lowered US interest rates would reduce the amount of money they made from loans. A narrower gap between the amount of interest banks can charge on new loans and the amount they’ve already promised to pay out to savers (their “net interest margin”) has a negative effect on profits.

The flip side of changing interest rates is that investors in bonds – the values of which fluctuate depending on said rates – suddenly become intensely interested in chopping and changing their portfolios. Feverish activity in late 2019 contrasted with a pretty quiet fourth quarter of 2018 and saw banks’ revenue from facilitating bond trading shoot up. At Goldman Sachs, for example, bond-trading revenue was 63% higher than a year ago – and even higher growth rates elsewhere helped Morgan Stanley report a record year of earnings and JPMorgan announce the most profitable year of any American bank ever.

Last year’s lower rates did take their toll, however. Not only did Bank of America’s interest income fall versus a year ago, but its overall profit dropped slightly too. And at Wells Fargo reduced rates sent the bank’s quarterly profit a full 11% lower than last year. Crucially, neither bank had as big an investment management business to lean on as the likes of Morgan Stanley. When times are tough, such revenues stay stable and predictable – unlike savings and loans businesses, whose earnings dance to central banks’ tunes, or trading businesses which rely (for better or worse) on investor sentiment.

🥡 Takeaways

Banks are the heartbeat of the global economy in that they feel and facilitate corporate and consumer spending alike – and their generally strong updates bode well for the strength of the US’s. Company earnings are necessarily backwards-looking, however, so investors may have taken comfort from fresh data out last week that was a bit more current: despite several retailers cautioning their holiday sales had been worse than expected, overall US retail sales in December actually grew. And with a January survey of manufacturing businesses’ outlooks massively exceeding expectations on Thursday, investors may be feeling particularly peppy.

British banks – which haven’t had to endure an interest rate cut since 2016 – might soon find themselves in the same boat as their American counterparts. Thanks to the UK economy unexpectedly shrinking in November and inflation (the rate at which the prices of goods and services increase) falling to its lowest level in over three years, investors now think there’s a more than 60% chance UK rates will be lowered later this month to lend economic support.

🎯 Also On Our Radar

Google parent Alphabet’s value crossed the $1 trillion threshold for the first time this week, with the company joining Apple and Microsoft in the “massive market cap” hall of fame. About 85% of Alphabet’s revenue comes from advertising – but investors likely hope that non-ad businesses like cloud computing, self-driving cars, artificial intelligence, and diabetes technology will drive the next trillion of shareholder value. Luckily for you, the analyst gnomes at Finimize HQ have dug into Alphabet’s financials: to understand what professional investors think about the tech giant’s chances of success, check out How Alphabet Works in the Finimize app.

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