This Week in Earnings – Q1’24

Executives Express Optimism Amid a “Constructive Environment” and a “Resilient” U.S. Economy; the Majority Expect Two or Three Rate Cuts this Year versus the Fed’s Latest Three-Cut Forecast

• PNC Financial Services ($58.6B): “Regarding our view of the overall economy, we’re expecting economic expansion in the second half of the year, resulting in real GDP growth of approximately 2% in 2024 and unemployment to increase modestly to 4% by year-end. We expect the Fed to cut rates two times in 2024 with a 25 bps decrease in July and another in November.”
• Blackrock ($112.1B): “The uncertain backdrop does not mean a lack of opportunities; instead, we see great opportunities for investors across a number of structural trends with near-term catalysts. These include rapid advancements in technology and AI, the rewiring of globalization, accelerated economic growth in certain emerging markets, and an unprecedented need for new infrastructure.”
• Citigroup ($119.9B): “The overall story has been consistent of late, one of economic resiliency, supported by tight labor markets and the consumer. This year looks poised to grow in many markets and conditions are generally disinflationary. We’re already seeing some central banks in the emerging markets starting to cut rates. In the U.S., a soft landing is viewed as increasingly likely, but we continue to see a tale of two Europe’s with Germany hurt by the weak demand for goods, while Southern European countries, such as Spain and Greece, benefit from stronger demand in services. In Asia, Japan is joining in the areas of bright spot and China’s economy has gained some more traction, although its property market remains a concern.”
• Goldman Sachs ($131.1B): “We continue to be constructive on the health of the U.S. economy. The Fed most recently telegraphed three rate cuts in 2024, but last week’s CPI print has lowered market expectations. This will continue to evolve and be highly data-dependent. I’m also mindful that U.S. equity markets are hovering near-record levels at a time when we continue to see headwinds, including concerns around inflation, the commercial real estate market, and escalating geopolitical tensions around the world. This combination could slow growth, but that said, the U.S. economy has proven to be resilient supported by a number of factors, including government spending, as well as labor force growth driven by above-trend levels of immigration. So, while the environment is constructive and markets expect a soft landing, the trajectory is still uncertain.”
• Bank of America ($277.2B):“I’d say, higher for longer is probably better for banks as a general statement. The question will become why are rates higher, what’s going on in the economy? Are we talking about inflation? Is it under control? Is it coming down? Right now, that appears to be the case. So, that’s obviously a good place. And the Fed is in a good place because they appear to have a real rate that’s high enough to make sure that inflation stays in a good place. An awful lot will depend upon the why for rates. But generally speaking, if it’s just because it’s taking a little while longer for the inflation to nudge down before the next set of cuts, that’s probably a good environment for us.”

Despite Continued Net Charge Offs, Execs Point to Consumer Resilience Amid a Strong Labor Market and Continual Wage Growth

• Citigroup ($119.9B): “Consumers remained financially healthy supported by a resilient labor market. While cash buffers have largely normalized, balances are still above pre-pandemic levels and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year.”
• Citizens Financial Group ($15.1B): “In consumer, we’re still in very good shape. The consumer is benefiting from still strong liquidity levels, a strong labor market. And so we haven’t seen any adverse migrations in delinquencies or anything like that.”
• US Bancorp ($59.0B): “Regarding consumer spending metrics, all the underlying metrics are strong.”
• JPMorgan ($517.2B): “I would say consumer customers are fine. The unemployment is very low. Home prices are up. Stock prices are up. The amount of income they need to service their debt is still… low, but the extra money of the lower income folks is normalizing, and you see credit normalizing a little bit. And of course, higher-income folks still have more money, they’re still spending it. So, whatever happens, the customer is in pretty good shape if they go into a recession. Businesses are in good shape. If you look at it today, their confidence is up, their order books are up, their profits are up. But what I caution people, these are all the same results of a lot of fiscal spending, a lot of QE, etc. And so, we don’t really know what’s going to happen.”
• M&T Bank ($23.2B): “We are seeing areas of pressure, particularly in certain businesses that may be more acutely impacted by the lag effects of higher rates for those impacted by reduced large-ticket consumer discretionary spending or a shift in spending on goods to services. For example, we saw an uptick in criticized loans to our non-auto dealer industries as higher rates have impacted large-ticket discretionary consumer spend and earlier COVID-driven buying saturated demand for these types of purchases.”
• Bank of America ($277.2B): “We’re encouraged by the trend of delinquencies because the late-stage increases slowed, and early-stage delinquencies improved as well. And that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so.”
• Wells Fargo ($200.2B): “Consumer net loan charge-offs continue to increase as expected.”

In the “Early Stages of Reopening” as Pent-up Deal Demand Appears to be Bubbling to the Surface; Still, Regulatory Concerns are Top of Mind

• Goldman Sachs ($131.1B): “It’s clear that we’re in the early stages of reopening the capital markets. For example, there were a number of large IPOs across geographies, and the strong reception across transactions including the IPOs of Galderma, Reddit and RENK is the latest sign that investors’ risk appetite is growing. In debt capital markets, tighter spreads have contributed to constructive issuance environment in investment grades, with volumes hitting a record for the first three months of the year. Given a more accommodative issuance backdrop, as well as the potential for increased acquisition financing alongside higher M&A activities, we expect solid levels of debt underwriting activity to continue this year.”
• Morgan Stanely ($146.5B): “The pipeline is clearly growing; it’s growing across sectors; it’s growing on a cross-border basis. There are some who will be willing to take the regulatory risk at this point in the cycle, and there is activity that we will see both from the financial sponsor community and the corporate community. This is a moment when most want to purify their business model or grow, and that scaling needs to take place now that the effects of COVID and supply chain are in front of us and geopolitics continue to be on our minds. It is not surprising that the C-suite wants to act, so we are in the early innings of a multi-year M&A cycle.”
• JPMorgan ($517.2B): “The question of M&A is probably the single most important question. We’re fundamentally happy to see momentum this quarter, happy to see momentum in announced M&A. A little bit cautious about the pull-forward dynamic, a little bit cautious about the regulatory headwinds.”
• Citizens Financial Group ($15.1B): “We’re expecting activity in general, even in the M&A front and M&A finance to be part of the story in the second half.”
• PNC Financial Services ($58.6B): “We are sticking to the 20% expectation for growth in capital markets and M&A YoY.”

Growth Remains Muted as Fed Rate Pause and Decreased Inventory Build Contribute to Weakened Demand

• PNC Financial Services ($58.6B): “Inventories are directly correlated with utilization and loan growth and we’ve seen capital spend and inventory build be next to nothing, even though capacity utilization is high and retail sales are high. And at some point, that’s got to give. But I do think there continues to be hesitancy on manufacturers in particular in the face of this economy, and that’s part of it.”
• Bank of America ($277.2B):“As the Fed has raised rates, it’s changed some of the borrowing patterns of our clients, but that’s not going to last forever because the economy powers through at 3.0%, 3.5%, whatever it ends up being, loan growth is going to catch up to that over time. So, for right now, we’re in that transition period.”
• First Horizon ($7.9B): “Loan demand is okay. It’s not great. It really is in pockets that you see real strength. I expect that the loan demand is likely to remain somewhat more modest, broadly speaking, in the economy, simply because we’re in that space between rates not going up anymore and rates not coming down. And people are still a little bit cautious and it’s going to take a little bit more certainty about when the Fed is going to move.”
• US Bancorp ($61.6B): “Loan and deposit growth remains under pressure for the industry, and that dynamic impacted our net interest income this quarter. We are seeing good opportunities for loan growth in targeted portfolios and notably, we continue to see consumer deposit growth despite the impact of quantitative tightening on industry deposit levels. Over the past few weeks, the outlook for potential rate cuts in 2024 has meaningfully changed as long-term rates have backed up. Client behavior across the industry is adjusting in response to the potential higher-for-longer interest rate environment that has impacted our deposit mix and pressure deposit costs.”
• Citizens Financial Group ($15.1B): “The fact that loan demand is a little light is okay. We’re not going to chase loan growth and if therefore there’s a little shrinkage in the balance sheet, we can run off our higher cost source of either FHLB funding or brokered deposit funding. So, we’re taking full advantage of that, which is helping bolster the NIM.”

Banks Anticipate Further “Uneven” and “Episodic” Losses in Coming Quarters

• Bank of New York Mellon ($40.7B): “There has been a lot of chatter in the market and in the press over the last quarter about what’s going to happen. I’m sure the backup in rates hasn’t really helped that chatter. But surveying other banks’ results so far this quarter, I haven’t really noticed any specific CRE bills on the back of what’s been going on over the last couple of quarters. So, it does feel like as a sentiment matter to be quite muted at the moment on the back of others’ earnings release.”
• PNC Financial Services ($58.6B): “The pressure is in the CRE book, specifically the office book.”
• Wells Fargo ($200.2B): “We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter, and therefore our expectations have not changed. We continue to expect additional losses in the coming quarters.”
• US Bancorp ($61.6B): “We’re continuing to see non-performing assets that will continue to tick up and did tick up in the first quarter. It’s primarily related to commercial real estate office space, and when we think about the rest of the year, probably in the second quarter, it’s going to tick up a bit more but then that growth rate it’s going to really moderate quite a bit. The thing to keep in mind with respect to commercial real estate office space is that we’ve aggressively reserved for that.”
• Bank of America ($277.2B): “We believe the losses on these office properties have been front loaded and largely reserved. We expect the losses to move lower in Q2 and we expect a notable decline in the second half of the year when compared to the first half of this year absent any material change in expected real estate prices.”