What’s News in Earnings: Bankers’ Glee Is Tempered With Uncertainty

Summary

WSJ What’s News - Episode Summary

Title: What’s News in Earnings: Bankers’ Glee Is Tempered With Uncertainty
Host: Chip Cutter
Author: The Wall Street Journal
Release Date: January 22, 2025

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Introduction

In the episode titled "What’s News in Earnings: Bankers’ Glee Is Tempered With Uncertainty," host Chip Cutter delves into the recent earnings reports of major U.S. banks. The discussion highlights the impressive profit growth of these financial institutions, the underlying factors contributing to their success, and the mixed sentiments among banking executives regarding future economic uncertainties.

Bumper Profits of Big Banks

Chip Cutter opens the conversation by noting the substantial profits reported by leading banks such as Goldman Sachs, JP Morgan Chase, and Bank of America. Alexander Saidi, the Wall Street Journal’s banking reporter, provides a detailed analysis:

“The Wall street businesses did really well in the last three months of 2024, but also really over the full year. One because companies are finally getting more confidence to borrow, spend and invest in their businesses again, but also in the markets.”
[01:09]

Saidi explains that the surge in investment banking fees and increased trading activity, driven by market volatility, significantly boosted the banks' revenues. For instance, JP Morgan reported nearly $10 billion more in earnings for 2024 compared to 2023, with investment banking fees rising from approximately $6 billion to $9 billion annually.

Executives' Outlook and Concerns

The conversation shifts to the sentiments of banking executives. Saidi notes a spectrum of emotions among leaders:

“There's a range of emotions coming from the executives right now. You've got some in a camp like David Solomon, Goldman Sachs, Ted Pick, Morgan Stanley, very optimistic about what's coming.”
[02:49]

While CEOs like Ted Pick of Morgan Stanley and Jamie Dimon of JP Morgan express optimism fueled by increased M&A activity and corporate confidence, there are underlying concerns. Dimon, for example, voices worries about inflation and geopolitical tensions potentially destabilizing markets:

“He remains very concerned about how those types of factors may influence banks and the economy in a way that can't exactly be quant.”
[04:15]

Consumer Finances and Economic Indicators

Chip Cutter raises a common perception that strong bank earnings signal a robust economy. Saidi counters this by highlighting the complexities of consumer finances:

“You're definitely seeing what all of the bankers are calling a normalization of consumer finances since the COVID-19 pandemic. And what that means is that people are spending a lot of their accumulated savings and on top of that, they're carrying more balances on their credit cards than they have in a really long time.”
[04:25]

Despite positive reports, there are warning signs. The Federal Reserve has indicated that credit card delinquencies have reached a 12-year high, nearing pre-2008 levels. Saidi suggests that banks may be focusing on wealthier consumers, potentially masking broader economic challenges faced by the general population.

Impact of New Administration and M&A Outlook

With the inauguration of a new administration, expectations of reduced regulations have spurred optimism in the banking sector. Morgan Stanley’s CEO, Ted Pick, shares that the bank's M&A pipeline is at its highest in seven years:

“The pent up activity that we're seeing is starting to release... you saw some very large capital raises that took place where enormous capacity was filled for great names over a weekend or over a 24 hour period.”
[05:30]

This surge in M&A activity is partly driven by private equity firms under pressure to return capital to investors, leading to a potential boom in acquisitions.

Bankers' Optimism and Anticipated Challenges

Saidi describes the prevailing excitement among bankers, attributing it to favorable macroeconomic indicators conducive to M&A growth:

“Jamie Dimon said that bankers were dancing in the streets after the November election. So there's been a real giddiness.”
[05:59]

However, challenges loom on the horizon. The ability to execute M&A deals is contingent on private equity firms managing companies bought during low-interest-rate environments. Additionally, rising interest rates and inflation pose risks:

“Inflation is probably the biggest because interest rates reset the whole matrix for how you evaluate if something's going to be profitable or not profitable.”
[06:59]

Dimon warns of potential scenarios like stagflation if inflation remains unchecked and interest rates escalate too rapidly.

Conclusion

The episode concludes with a balanced view of the banking sector's current state. While major banks are enjoying significant profit growth and a buoyant outlook on M&A activities, there are credible concerns about inflation, interest rates, and broader economic stability. The interplay between these factors will determine whether the current optimism is sustainable or if unforeseen challenges may temper the banks' success.

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Notable Quotes:

• Alexander Saidi [01:09]: “More confidence to borrow, spend and invest in their businesses again, but also in the markets.”
• Alexander Saidi [04:25]: “Carry more balances on their credit cards than they have in a really long time.”
• Alexander Saidi [05:59]: “Jamie Dimon said that bankers were dancing in the streets after the November election.”
• Alexander Saidi [06:59]: “Inflation is probably the biggest because interest rates reset the whole matrix for how you evaluate if something's going to be profitable or not profitable.”

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This summary encapsulates the key discussions, insights, and conclusions from the podcast episode, providing a comprehensive overview for those who have not listened to the original broadcast.

Transcript

[A]

Hey listeners, it's Wednesday, January 22nd. I'm chip cutter for the Wall Street Journal and this is what's News in Earnings. Last earnings season we tried something new, a look at the big themes that stood out in corporate earnings reports. And the response we got was so overwhelmingly positive that we're going to make it a regular fixture in the what's News feed. Each earnings season we'll have a number of episodes looking at what corporate reports and analyst calls can tell us about what's going on under the hood of the American economy. Starting today with banks. Big banks unofficially kicked off the earnings season, giving us insights into consumer borrowing, investors trading habits, the M and A outlook, and more. Wall Street Journal banking reporter Alexander Saidi spent some time analyzing the results of companies like Goldman Sachs, JP Morgan Chase, bank of America and more. He's here now to help explain what stood out and what's on the horizon. Hi, Alex.

[B]

Hey, Chip.

[A]

All right, so some of the country's biggest banks ended the year with bumper profits. Those firms with Wall street arms really seem to do particularly well. So what explains their big profit growth?

[B]

The Wall street businesses did really well in the last three months of 2024, but also really over the full year. One because companies are finally getting more confidence to borrow, spend and invest in their businesses again, but also in the markets. So all of that is good for the investment banking business because that more fees, that's more transactions. And then on the trading side you saw a lot of volatility, especially in the last three months because of the election. That all means a lot of buying and selling activity that traders do on behalf of bank clients. So some things we saw in the full year reported financials for banks. JP Morgan, for example, reported it earned almost 10 billion more in 2024 than it earned in 2023. Investment banking fees for the full year came in around 9 billion compared to about 6 billion in 2023. Morgan Stanley also reporting several billion dollar gain. Also at Goldman Sachs and Morgan Stanley, you saw double digit percentage gains in the amount they were earning from investment banking. And there were many ways in which banks brought in more money last year. At JPMorgan Chase, we saw fees from card services and auto go up around 12% while fees from asset management were also up around 10%. So add it all together, add the trading and the banking fees together and you just get a lot of money coming in the door for some banks that really have big investment banking and Wall street related business lines.

[A]

So how are executives at banks like Goldman and JP Morgan feeling about what's ahead when they talk to their clients in all sorts of industries, what are they hearing?

[B]

Right. So there's a range of emotions coming from the executives right now. You've got some in a camp like David Solomon, Goldman Sachs, Ted Pick, Morgan Stanley, very optimistic about what's coming. And I mean, it's worth mentioning too, Goldman and Morgan Stanley are very heavy in the investment banking businesses. They do a lot of M and A, lots of capital raising for clients. So what they're seeing is just like a big boost of confidence coming from the C suite of corporate America, and that's really giving them a positive outlook. On the consumer side, I would say there is still a good feeling from bankers like Jamie Dimon and Brian Moynihan, who run two of the bank's biggest consumer banking franchises. But you're not seeing the kind of insane high levels of growth there from a profit basis. Some executives, though, like Jamie Dimon, are very worried about the path of inflation over the next four years. To what extent are conflicts around the world going to spill over and cause markets to seize up like we saw in 2022 when Russia invaded Ukraine, to a lesser extent over the Israeli conflict? So he remains very concerned about how those types of factors may influence banks and the economy in a way that can't exactly be quant.

[A]

So I think a lot of people would look at the results of the big banks and think, okay, well, if they're reporting these results, we should just assume the economy is ticking along and doing great too. Is that a correct read of everything?

[B]

You're definitely seeing what all of the bankers are calling a normalization of consumer finances since the COVID 19 pandemic. And what that means is that people are spending a lot of their accumulated savings and on top of that, they're carrying more balances on their credit cards than they have in a really long time. And bankers are saying they're not worried about a consumer apocalypse yet. But the Fed has put out data showing credit card delinquencies are at like a 12 year high now. They're getting closer to levels we saw before 2008 and after 2008. So the banks are increasingly focused on wealthy consumers and they're telling us our consumers look fine. They may be really focusing on a segment of the American population here, and their results may not tell the full story about what's happening for all Americans.

[A]

So this is also the start of a new administration and we're hearing a lot about fewer regulations and what the next four years might look like for companies. Morgan Stanley CEO Ted Pick told an investors call that the bank's M and A pipeline is at its highest level in seven years.

[B]

The pent up activity that we're seeing is starting to release. You saw some announcements going into the end of the year. You saw some very large capital raises that took place where enormous capacity was filled for great names over a weekend or over a 24 hour period.

[A]

Are bankers gleeful about the fees and deals headed their way? What are they anticipating? How are they getting ready for this?

[B]

Yes, I think gleeful is a totally fair adjective to use. Jamie Dimon said that bankers were dancing in the streets after the November election. So there's been a real giddiness. And the thing is, the macroeconomic statistics are pointing in a really favorable way for an M and A boom. There hasn't really been a big M and a year since 2021. Private equity firms are under pressure to return capital to their institutional investors, which they do by selling companies. And that's been delayed for years. And at some point something's got to give. A lot of people think that could be this year. So I think that's why bankers like Pick are saying this pipeline looks better than ever. Now the real question is, can they execute? Private equity firms bought a lot of these companies when interest rates were at zero. Interest rates are not at zero right now and that already puts them on a tough footing.

[A]

I wonder, just looking ahead, what does make bankers nervous? Is there anything that could throw banks off in the months ahead that they really worry about?

[B]

Inflation is probably the biggest because interest rates resets the whole matrix for how you evaluate if something's going to be profitable or not profitable. So if a number of the new policies from the administration dramatically change the size of the workforce or raise the cost of goods to be imported to the country, all this winds up in inflation and all of that winds up in interest rates. And that could really undo things. Rates going up too fast could wind up causing some kind of like stagflation scenario. That's another one Jamie Dimon often flags. So I think there's a lot of concern that this goodwill and excitement doesn't taper off into a darker scenario. But it's too early to tell.

[A]

So interesting as always. Alexander Saidi, banking reporter for the Wall Street Journal, thanks so much for walking us through all of this.

[B]

Thank you. Happy to be here.

[A]

And that was what's news and earnings. Today's show is produced by Anthony Manci with supervising producer Michael Kosmides. Additional sound, courtesy of S and P Global Market Intelligence. Later today, we'll have the PM edition of what's News out for you as usual. And we'll be back later this earnings season, diving into another industry. Until then, I'm Chip Cutter. Have a great day.