This Week in Earnings – Q2'24

A Return to Normalcy on the Horizon? Cooling Inflation and Renewed Equity and Deal Market Strength Spark Confidence, though Execs Mull Over Persistent Uncertainties, Including High Interest Rates and the Impending U.S. Election

• Citigroup ($127.5B): “Looking at the macro environment as we enter the second half of the year, the U.S. is still the world’s most structurally sound economy. After a break in progress, inflation now appears back on a downward trajectory.Services spending has remained on an upward trend, although there were clear signs of a softening labor market and the tightening of the consumer budget. And of course, you might have heard there is an election in November. In Europe, while rate cuts have begun, the region’s lack of competitiveness continues to be a drag on growth. In Asia, China is growing moderately, albeit with government stimulus, and their pivot to high-tech manufacturing is being challenged by tariffs on EVs and semiconductors.”
• Wells Fargo ($202.5B): “Looking ahead, overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth. However, the economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates.”
• JPMorgan ($603.4B): “There has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade, and the remilitarization of the world. Therefore, inflation and interest rates may stay higher than the market expects.”
• Bank of New York Mellon ($48.3B): “We’re looking out and it seems to be some greater consensus than we’ve had for a little while around what might happen with the Fed in the fall. Across September and the balance of year, it’s easy to think somehow that the range of risks have somehow narrowed as a result of that. But there’s still a lot of uncertainty in the world. We’ve got a whole bunch of other types of geopolitical risks out in the world. We’re continuing to grind through elections that we’ve talked about through the course of the year. There are all sorts of other things happening. We’ve still got wars going on.”
• Bank of America ($345.8B): “It’s been a pretty unusual period in history where we’ve had an enormous change in the rate structure and in the fiscal stimulus and the effects now fading away to something more normal.”
• Morgan Stanley ($174.0B): “The Investment Banking backdrop continues to improve, led by the U.S. The advisory and underwriting pipelines are healthy across regions and sectors. Inflation data has continued to moderate, which has helped stabilize front-end rates and support boardroom confidence and sponsor reengagement.”
• Synchrony Financial ($20.9B): “We’re being a little bit more cautious with regard to how we think about the macro going forward until we see signs that inflation really is breaking through some of this stickiness and you see some health to those consumers.”
• PNC Financial Services ($70.0B): “This whole uncertainty as we come up into the election on what’s it going to look like from a regulatory basis, what am I allowed to invest in? Am I going to get it approved? All of that, there’s a lot of pent-up energy behind that, and we’ll see.”
• Interactive Brokers Group ($52.1B): “The lower interest rates obviously spur economic growth, but there is going to be a lot of uncertainty. We still have two wars…and in Europe, there is election season. We are going to have a new administration. There is a lot of uncertainty as to how that is going to play out, or what exactly that’s going to mean. Even if the Trump ticket wins the election, it’s unclear exactly what the impact is going to be, because there is a chatter about increased tariffs, which can in turn increase inflation.”

Stark Divide as High Earners Drive Spending, Offsetting Weakness in Lower Income Groups; Execs Point to 2H Stabilization of Charge-offs and Delinquencies

• JPMorgan ($603.4B): “When it comes to card charge-offs and delinquencies, there’s just not much to see there. It’s normalization, not deterioration. It’s in line with expectations. When you look specifically at spend patterns, you can see a little bit of evidence of behavior that’s consistent with weakness in the lower-income segments where you see a little bit of rotation on spend out of discretionary into non-discretionary.”
• Bank of America ($345.8B): “In previous calls, many of you’ve asked questions or commented upon the question about consumer net charge-offs and when would they stabilize in the second half of 2024. That expectation remains unchanged. This quarter’s net charge-offs were 59 bps. For context, this is stabilization of the rate. I will just remind you that prior to this quarter, I have to go all the way back to 2014 to see a charge-off rate of that high and that’s near when we were still emerging from the financial crisis.”
• Citigroup ($127.5B): “When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019, and it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates. Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates. That said, we’re seeing signs of stabilization and delinquency performance across our Cards portfolio. There was good revolving balance and loan growth in both Branded Cards and Retail Services, and we continue to see differentiation in the Credit segment, with the lower income customers seeing pressure.”
• Morgan Stanley ($174.0B): “We’ve seen increased spending by higher net worth, and so higher income bands are certainly spending. We see that in the data alongside actual spending. We see that in purchases of homes. We see that in various tailored investments. So that cohort, so to speak, is using its cash in different ways and its various investment in different ways. So, I do think that that’s an interesting dynamic that’s playing out. I know that others have mentioned it within their portfolios as well. It’s something we’re seeing in our data.”

Economic Caution and Higher Interest Rates Continue to Mute Demand Despite Some Positive Signals; CRE Remains a Sore Spot, but is “Manageable”

• JPMorgan ($603.4B): “Demand for new loans remains muted as middle market and large corporate clients remain somewhat cautious due to the economic environment, and revolver utilization continues to be below pre-pandemic levels. Also, capital markets are open and are providing an alternative to traditional bank lending for these clients.”
• PNC Financial Services ($70.0B): “We are muting our loan growth assumption. We did that because we got tired of saying, ‘Hey, loan growth is going to come at some point,’ so we took it out of the forecast. If it shows up, we’ll benefit like everybody else. There’s a basis for some loan growth in the second half. But the important point is we’ve taken it out of our guidance.”
• Wells Fargo ($202.5B): “The higher interest rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand, and we’ve not changed our underwriting standards to chase growth. While losses in the commercial real estate office portfolio increased in the second quarter after declining last quarter, they were in line with our expectations. As we have previously stated, commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients. We continue to actively work to de-risk our office exposure, including a rigorous monitoring process.”
• ServisFirst Bancshares ($4.4B): “We’ve been waiting for the C&I to come back and we did see that this past quarter. We saw for a long time we had a double negative. We had people taking money out of their money market and checking accounts and making capital expenditures instead of borrowing from us. That’s a double hit. So now they’re back, borrowing money again for capital expenditure projects. We feel good about organic loan demand picking up with our existing customer base, which is what we’ve been needing. And of course…there’s a lot of CRE projects that are on permanent hold based on the higher interest rates.”
• Bank of America ($345.8B): “With regard to Commercial Real Estate…we continue to aggressively work through our loans and office portfolio. We saw a decrease in all the categories. A decrease in reservable criticized loans, a decrease in NPLs, and a decrease in net charge-offs. This supports our previous expectation that net charge-offs in the second half of 2024 will be lower than the first half of 2024.”

Trillions in Infrastructure Spend Expected as Integration Accelerates, Enhancing Productivity, Client Service, and Operational Efficiency; U.S. Bank Execs get Specific and Tout Use Case Examples

• BlackRock ($124.0B): “I talked about the confluence of power and AI and data centers. And I believe this is going to be one of the world’s biggest growth engines as we start trying to develop AI for everyone. AI, not just for the big powerful organizations, but AI utilization for everybody, for every country in the world. It is going to require trillions of dollars of investments. And our conversations with the hyperscalers, our conversations with governments, our conversations with the chiller suppliers, the cogeneration suppliers, the opportunity we have in infrastructure is way beyond what I’ve ever imagined, even just seven months ago when we were contemplating the [Global Infrastructure Partners] transaction and formalizing it.”
• Goldman Sachs ($162.0B): “Most companies around the world are focused on how you can create use cases that increase your productivity and if you think about our business as a professional service firm, a people business, where we have lots of very, very highly-productive people, creating tools that allow them to focus their productivity on things and advance their ability to serve clients for interactive markets is a very, very powerful tool. So, if you look across the scale of our business, you can think of lots of places where the capacity to use these tools, to take work that’s always been done on a more manual basis and a lot of very smart people to do that work to focus their attention on clients are quite obvious.”
• Bank of America ($345.8B): “Our recent example of our use of AI is our advisor client insights tool. We delivered more than 6M insights YTD to our Financial Advisors providing them proactive engagement with clients. AI has moved from cost savings ideas to enhancing the quality of our customer interactions.”
• Citigroup ($127.5B): “We’re learning from best practices and we’re using some great AI and other data tools that are helping to identify anomalies in data and data flows much quicker.”
• Wells Fargo ($202.5B): “There’s traditional AI and then there’s Gen AI. We have a huge number of use cases already embedded across the company with traditional AI and that is in marketing, it’s in credit decisioning, it’s in information that we provide bankers on both the wholesale and the consumer side about what customers could be willing or might be willing to entertain a discussion about…The new opportunity that exists with Gen AI is where AI creates something based upon whether it’s public data or our own data in terms of things that haven’t existed. We are most focused in the shorter-term on things that can drive efficiency but also contribute to quality of the experience for our customers.”
• Bank of New York Mellon ($48.3B): “We continue to automate. We continue to reduce manual processes, which ultimately will feed into head count and better quality jobs for our folks and better careers.”

As Market Conditions Improve, Executives Tout “Early Stages of a Multi-year Investment Banking-Led Cycle”

• JPMorgan ($603.4B): “The dialogue on equity capital markets is elevated and the dialogue on M&A is quite robust as well. All of those are good things that encourage us and make us hopeful that we could be seeing a better trend in this space.”
• Citigroup ($127.5B): “We expect the rate environment and the financing markets to continue to be accommodative, as well as to continue deal making, with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that.”
• Morgan Stanley ($174.0B): “We’re seeing some tempering of the inflation prints and some normalization rates. We’re also beginning to see the market broaden out. We can now expect broader corporate finance activity to quicken, whether that is across the corporate community or sponsors or other institutions. And the early sign of this activity can be seen in the convertibles product. Global convertibles activity is up significantly. We’re also seeing bake-offs running at triple plus the YoY rate that they were at for certain sectors and for some of our client groups. We’ve been seeing now the launch of traditional IPOs and we’re seeing M&A pipeline kicking in. We’re in the early stages of a multi-year investment banking-led cycle.”
• Goldman Sachs ($162.0B): “Our investment banking backlog is up significantly this quarter. From what we’re seeing, we are in the early innings of a capital markets and M&A recovery…[and while] we definitely see momentum pick-up, we’re still operating at levels that are still significantly below 10-year averages, we’ve got another 20% to go to get to 10-year averages on M&A. One of the reasons why M&A activity is running below those averages is because sponsor activity is just starting to accelerate, and so especially given the environment that we’re in, you’re going to see that over the next few quarters and into 2025 the re-acceleration of sponsor activity.”