This Week in Earnings – Q4’23

While Risks Still Cloud Commentary, Executives Express Optimism for 2024, Citing Economic Resilience in the U.S. and Increased Confidence for a Soft Landing

• Bank of America ($251.1B): “We began the [fiscal] year with a pretentious aura as economists predicted a mild recession. Instead, 2023 showcased economic resilience led by U.S. consumers despite higher interest rates. Now, we’ve ended 2023 with our economists projecting the Fed has successfully steered the U.S. economy to a soft landing.”
• Citigroup ($97.7B): “2024 looks to be similar to 2023 in terms of the macro environment with moderating rates and inflation. We expect to see growth slowing globally with the U.S. well-positioned to withstand a run-of-the-mill recession should one materialize.”
• Goldman Sachs ($123.0B): “The U.S. economy proved to be more resilient than expected, and I’m encouraged by capital markets activity. I’m not going to say it’s running back to 10-year averages right away, but it has materially improved. There are still debates about if the Fed does or does not continue on its quantitative tightening. So, all this will continue to play into people being active in markets. But at a high level, the environment in 2024 feels like it will be better for our mix of businesses than it was in 2023.”
• Morgan Stanley ($137.3B): “We enter 2024 with confidence, and our base case for the coming year is constructive. There are two major downside risks. The first is geopolitical, that global conflicts intensify and conflagrate. The second is the state of the U.S. economy over the course of 2024. The base case is benign, namely that of a soft landing. These risks… present some uncertainties as we start 2024. While downside risks are linked to the consumer with the rate path and geopolitics as two key determinants, we expect the U.S. will lead the recovery globally. Corporate confidence will ultimately drive the cycle forward.”
• Wells Fargo ($168.0B): “As we look forward, our business performance remains sensitive to interest rates and the health of the U.S. economy. We are closely monitoring credit, and while we’ve seen modest deterioration, it remains consistent with our expectations.”

Spending Remains Better Than Feared as Still-Gainfully Employed Consumers Exhibit “Slow and Gradual” Normalization to Post-Pandemic Levels; Sustained Dynamics Anticipated throughout 2024

• Bank of America ($253.6B): “We see consumer activity indicating that they’re still in the game, they’re still spending money. Where they are spending is a little different, more in services and going out in restaurants and experiences and less on goods at retail. We’re getting pretty close now to things beginning to stabilize. They’re beginning to normalize. This is a period of transition for the economy, and it’s a period of transition for our clients, too.”
• Citizens ($14.6B): “[We see] continued normalization on the consumer side, which has been extremely slow and gradual, but they’re still slightly better than where we were pre-COVID. We should see that sustain in the first half of the year as rates start to tick down. We’re starting to see good dynamics with the consumer, and we expect that to continue.”
• Discover ($24.4B): “What we’re seeing is that consumers had significant amount of savings. Those savings levels have been depleted. You had a spending pattern with the consumers across the board that was reflecting pent-up demand. As savings rates came down, the consumers needed to adjust their spending patterns. Some did successfully, some did not.”
• M&T Bank ($21.8B): “We are encouraged by the continued strong performance of the consumer as well as wage growth above inflation that has helped drive consumer spending. Consumer spending has slowed enough to alleviate inflation pressure for many goods and services. We expect that to continue in 2024.”
• Wells Fargo ($168.5B): “The financial health of our consumers remains strong. While average deposit balances per customer continued to decline from their peak, they remained above pre-pandemic levels. As wage growth has more than offset increased spending, consumer spending remains strong.”

Despite Regulatory and Political Uncertainty, a “Constructive” Interest Rate Backdrop and Prospects for a Soft Landing Boost M&A Sentiment, with Most Pointing to an Uptick in Activity through Q4

• P. Morgan ($478.2B): “All else equal, this more dovish rate environment is of course supportive for capital markets. We are in an environment of M&A regulatory headwinds, as has been heavily discussed. But having said that, we’re seeing a bit of pick-up in deal flow, and I would expect the environment to be a bit more supportive.”
• Hancock Whitney ($3.8B): “Acquisition finance is obviously very low right now as people struggle with what the appropriate valuation is for different businesses that could be available for sale for whatever reason. That’s going to probably continue to occur until we get past the election and people understand what the tax posture might be in terms of those types of transactions.”
• Goldman Sachs Group ($124.1B): “There’s no question that the capital markets and M&A activity levels have been depressed. As I’ve said before, I don’t think that continues YoY and we really started to see in the second half of this year real improvement… the M&A backlog saw really strong replenishment and improvement in Q4.”
• Morgan Stanley ($137.3B): “We’ve had a very light M&A calendar, so that has been in a trough. However, we quite possibly could have a dynamic where if we are in this soft-landing zone, we could see increased activity.”
• Citizens ($14.6B): “[Regarding M&A] it’s basically a continuation of some of the trends we’re seeing in Q4 of 2023, where capital markets are starting to pick up again. Pipelines are incredibly strong. And the lead driver seems to be M&A advisory. That’s picked up in Q4, not only due to seasonal factors, but in terms of a more constructive backdrop.”

Outlooks Remain Varied; While Some Anticipate Muted Demand Due to Tight Financial Conditions, Others Expect Improvement in 2024 as Rates Ease and the Economy Improves

• U.S. Bancorp ($64.5B): “We have four interest rate cuts by the Fed starting in the second quarter of this year. Now, whether or not that’s two cuts or six cuts, it’s not going to be a material driver to our outlook. By the end of this quarter, we’ll be nine months past the last Fed hike, as an example. Our loan pipelines have continued to strengthen over this quarter, certainly stronger than we’ve seen in the past couple of quarters. And we think that loan demand should be improved just given that the Fed is likely going to be in a cutting mode over time.”
• Hancock Whitney ($3.8B): “Starting with the balance sheet, loan balances were relatively flat this quarter as loan demand once again was tepid in Q4, similar to the last several quarters. As we look forward into 2024, we expect loan demand will return after rates begin to soften mid-year, and therefore much of our loan growth is anticipated in the second half of the year.”
• Synovus Financial ($5.4B): “Short-term, if rates are going lower, it tells us that the economy is slowing. So, there may be a latent impact of that. But longer term or more moderate term, it could drive up commercial and industrial, as people are looking at projects again and starting to expand their facilities or add inventory as prices come down. Regarding the economy, the underlying economic conditions remain constructive, and it would result in having stronger loan growth in the out quarters.”
• Bank of America ($251.1B): “You can see loan growth improved this quarter as we saw improvement in both credit card and commercial borrowing offset by declines in commercial real estate and securities-based lending. The commercial growth reflects good demand overall and was muted only at quarter-end by companies paying down commercial balances as they finalize their year-end financial positions.”

With Further Charge Offs Expected, Companies Continue to Reduce Exposure and Keep Counterweight Reserves Elevated

• Goldman Sachs ($123.0B):”We have a new disclosure the last couple quarters on CRE in particular on the nature of the loans in that sector and then as well as office, in particular. You can obviously see from those disclosures we’ve made substantial progress moving down the positions over the course of 2023.”
• Wells Fargo ($0B): ”The increase in commercial net loan charge-offs reflected the higher losses in commercial real estate office, while losses in the rest of our commercial portfolio were stable from the third quarter. As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remained weak… it is still somewhat specific to the asset. When you look at the broader CRE market, at least in our portfolio, we are not seeing the stress spread to other parts.”
• PNC ($59.2B): “Our credit quality remained strong during the quarter, reflecting our thoughtful approach to growing our balance sheet. While we continue to expect credit charge-offs to increase over time, particularly in the CRE office segment, we’re adequately reserved.”
• M&T Bank ($22.0B): “From a timing perspective, it’s hard to say exactly when [CRE] reserves will get adjusted. Right now, we feel good with what we have given what our risk is that we know right now on the credit side. But over time, probably, there will be some reserve releases… you just don’t know when that’s going to happen.”