Big Bank Earnings: A Tale of Two Halves

Last week, the earnings season for major U.S. banks wrapped up, offering a mixed bag of results that painted a complex picture of the financial landscape. While some banks reported strong performances, others struggled with declining net interest income (NII) and rising expenses. Let's dive into the key takeaways and what we can learn from these earnings reports.

The Good: Investment Banking and Trading Revenue

The resurgence in investment banking and trading revenue was a standout theme among the major banks. JPMorgan Chase (JPM) reported a 49% increase in investment banking fees, while Bank of America (BAC) saw a 44% increase. Goldman Sachs (GS) and Morgan Stanley (MS) also benefited from the rebound in dealmaking and M&A activity, with significant increases in investment banking revenue.

This surge in investment banking revenue can be attributed to several factors, including the resurgence in Wall Street dealmaking, the Fed's interest rate cuts, and the rebound in M&A activity. The strong performance of U.S. stock markets also contributed to the increase in asset management fees, which further boosted investment banking revenue.



The Bad: Declining Net Interest Income

Despite the strong performance in investment banking, many banks faced declining NII due to rising deposit costs. JPMorgan Chase, for example, experienced a 3% decline in NII in the third quarter of 2024 compared to the previous quarter, and a 4% decline year-over-year (YoY). Wells Fargo (WFC) also reported a 9% decline in NII compared to the same quarter a year ago.

The decline in NII affected the earnings of the largest U.S. banks by reducing their key driver of profitability. However, the resurgence in investment banking activity helped offset this decline, as the banks benefited from increased dealmaking and M&A activity following the Fed's interest rate cuts.



The Ugly: Rising Expenses and Credit Losses

While investment banking revenue and NII painted a mixed picture, some banks also faced rising expenses and credit losses. JPMorgan Chase, for instance, reported a 7% increase in non-interest expenses, while Wells Fargo's expenses rose by 12%. Additionally, many banks set aside more money for potential credit losses, with JPMorgan's provision for credit losses more than doubling compared to the same period a year ago.

These rising expenses and credit losses could indicate potential challenges for the U.S. economy, as consumers and businesses may struggle with higher debt levels and reduced spending power. However, it is essential to monitor these trends closely to determine if they are a temporary blip or a more significant shift in the economic landscape.

In conclusion, the earnings reports from major U.S. banks last week offered a tale of two halves, with strong investment banking and trading revenue offsetting declining NII and rising expenses. While the resurgence in investment banking activity bodes well for the financial sector, the decline in NII and rising expenses may signal potential challenges ahead. As we move forward, it will be crucial to monitor these trends and assess their implications for the broader economy and the banking sector.