This Week in Earnings – Q3'24

Executives Describe U.S. Economy as “Strong” and “Resilient” and See Prospects for a Soft Landing Supported by Rate Cuts; However, Heightened Uncertainty Over Geopolitical Turmoil and the Upcoming U.S. Election Still Has Banks Preparing for “Tail Risks” and a “Variety of Economic Environments”

• Goldman Sachs ($165.0B): “As I look at the operating backdrop, the U.S. economy continues to be resilient. Inflation has been coming down, the recent unemployment data is supportive, and while we’ve seen some softness in consumer behavior, the tone of my recent conversations with clients has been quite constructive. The beginning of the rate cut cycle has renewed optimism for a soft landing, which should spur increased economic activity. More broadly, clients remain highly focused on the trajectory of rates in jurisdictions around the world, the policy implications of global elections, particularly in the U.S., and the high levels of geopolitical instability. Against this backdrop, our leading global franchises are supporting our clients as they navigate risks and position themselves for a range of outcomes.”
• JPMorgan ($617.0B):“We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse… Additionally, while inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. While we hope for the best [with] these events and the prevailing uncertainty demonstrate why we must be prepared for any environment.”
• Bank of New York Mellon ($55.6B): “While markets have been constructive, there are clearly risks and uncertainties ahead. And so, we constantly prepare and position for the many tail risks that exist, from geopolitical tensions and conflicts to fiscal deficits, and the impact of impending regulations and elections.”
• Wells Fargo ($211.6B): “Looking ahead, overall, the U.S. economy remains strong with inflation slowing and a resilient labor market, boosting income and supporting consumer spending. Company balance sheets are strong, contributing to both consumption and investment in the economy but slowing demand for commercial lending. We continue to be prepared for a variety of economic environments, and we’ll balance our desire to increase returns and grow while protecting the downside.”
• PNC Financial Services Group ($76.2B): “It varies by industry. But a simple notion is companies at the margin are losing margin, right? They can’t pass on prices the way they want because they’re not making it up in volumes. So, the discussion of how do I cut costs has at least entered the dialogue, but we haven’t seen that show up in layoffs. The data remains strong. And as long as the data’s strong, consumers are spending, then the economy’s strong. So, everybody’s staring and watching and looking and there’s margin pressure on corporates. But we don’t see in conversations some pending big layoff spike hitting the U.S. economy. There are specific industries that are in slumps, whether it’s transportation, healthcare, consumers staples, but it’s just at the margin.”
• Citigroup ($122.1B): “Though our growth is a notch slower than last year, global economic performance continues to be surprisingly resilient. Whatever you want to call the U.S. landing, the sentiment around it is more optimistic, supported by the recent positive payrolls report. And we see a healthy, yet more discerning U.S. consumer and the U.S. corporate sector on its front foot. Manufacturing weakness is restraining a modest rebound in Europe, which continues to struggle with more structural challenges around its competitiveness as highlighted by Draghi’s report. In China, consumer sentiment in the property market remains a concern as markets await details on the expected fiscal stimulus. India, ASEAN, Japan, the Middle East, Mexico and Brazil are all notable bright spots.”

After 50 bps Fed Rate Cut (and Further Rate Cuts Expected – Two More in 2024 By Most Estimates), Execs Highlight Dynamic Response to Shifting Yield Curve; Near-term Headwinds for Some Seen Abating in 2025

• Bank of America ($332.6B): “I’d say on the rate cuts, if you were to go back to when we provided Q3 guidance, at the time we said one cut in September, one in October, one in November, and as it turns out, we all know that there were two cuts in September. That extra cut flows all the way through the fourth quarter. It’s not just two weeks in the quarter or six weeks. It’s the full quarter. So that’san additional headwind if you like, so that obviously hurts overall. Global Markets is liability-sensitive and they’ve continued to grow their loans, so if the rate cuts hurt us a little bit more in that original waterfall, you get a little bit of that back in Global Markets NII.”
• Morgan Stanley ($193.5B): “While average sweeps were down slightly, we’ve seen recent signs of stabilization, particularly as the Fed began cutting rates. This is encouraging. Looking ahead to the fourth quarter, we would expect NII to be modestly down [QoQ], largely on the back of lower rate expectations, consistent with the forward curve.”
• JPMorgan ($617.0B): “From where we sit now, given the yield curve, assuming the yield curve materializes…we do see a pretty clear picture of sequential declines in NII ex-Markets, but the trough may be happening sometime in the middle of next year at which point the combination of balances, card revolve growth and other factors can return us to sequential growth.”
• First Horizon ($9.3B): “It’s probably going to be more of a push-and-pull quarter to quarter. It really depends on how quickly [the Fed does] the rate cuts. We see back-to-back rate cuts in November, December, and then we see some stabilization. Our margin can stabilize, but we continue to see month after month or quarter after quarter repricing down.  59% of our loans are going to reprice down our deposits. We’re going to have to work through that as they come off promotions and new to bank. I don’t think it will necessarily be a steady trajectory one way or the other based on the current forward curve in 2025. But we are doing everything we can to put things in place to make sure that we can take some asset sensitivity off of the table as we see a very uncertain rate cut environment.”
• US Bancorp ($73.3B): “Broadly speaking, rate cuts are a positive thing for us in the sense that we have a deposit base that’s conducive to cuts. We have 50% of our deposit base is in institutional and 50% is retail. We’re able to cut institutional rates fairly quickly.  And the other thing is that over time as the cuts happen, then that implies a more upward sloping curve which would help us in our trajectory going forward as well. So those are the two pieces that I would point to.”
• PNC Financial Services Group ($76.2B): “We believe our total rate paid on deposits has reached its peak level. And with the 50 bps cut in September, we’ve already begun to reduce deposit pricing. Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 bps at both the November and December meetings, which will accelerate deposit repricing, particularly within our high beta commercial interest-bearing deposits.”
• Huntington Bancshares ($22.4B): “We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves. Our forecast is aligned with a forward curve which projects two additional 25 bps rate cuts by year end and a further five 25 basis point rate cuts in 2025.”

Shift from Discretionary to Staples Continues: Lower Income Groups Remain Under Pressure, Though Consumers Broadly Seen on Solid Footing, Described as “Healthy but More Discerning” with Spending

• Citigroup ($122.1B): “The U.S. consumer dynamics remain remarkably consistent with prior quarters. Our customers are healthy but more discerning in their spend, with signs of stress isolated to the lower FICOs. We’ve maintained strong credit discipline, and our card portfolios continue to perform very much in line with our expectations. Based on what we see, the U.S. consumer continues to remain healthy and resilient.”
• JPMorgan ($617.0B): “What there is to say about consumer spend is a little bit boring in a sense, because what’s happened is that it’s become normal. [Coming out of the pandemic], you had a big spike in T&E, the big rotation into discretionary spending, and that’s now normalized. And you would normally think that rotation out of discretionary into nondiscretionary would be a sign of consumers battening down the hatches and getting ready for a much worse environment. But given the levels that it started from, we actually see it as normalization.”
• Bank of America ($332.6B): “As we have talked about many times, our consumer payments are an indicator of activity. Those payments were up 4 to 5% YoY for the quarter. The pace of year-to-year money movement has been steady since late summer this year after having fallen in the spring and early summer. This growth in consumer payments continues into October. This activity is consistent with how customers were spending money in the 2016-2019 timeframe when the economy was growing and inflation was under control. This is not meant to say that consumers are not wary of the cost of living, worried about higher rates and other matters, but overall, activity is fine, unemployment is low, and wage growth is steady, both of which bode well for the consumer overall and for consumer asset quality.”
• Wells Fargo ($211.6B): “We continue to look for changes in consumer health, but we have not seen meaningful changes in trends when looking at delinquency statistics across our consumer credit portfolios. Both credit card and debit card spend were up in the third quarter from a year ago, and although the pace of growth has slowed, it is still healthy. We continue to see more pronounced stress in certain customer segments with lower deposit and asset levels, where inflation has partially offset strong employment and wage growth. The benefits of inflation slowing and interest rates starting to ease should be helpful to all customers, but especially those on the lower end of the income scale.”

Remains Muted amid Macro Uncertainty and Still Elevated Borrowing Costs; Optimism Exists for Further Fed Rate Cuts and Post-Election Clarity to Loosen Pent-Up Demand in 2025

• JPMorgan ($617.0B): “In the Middle Market and large Corporate client segments we continue to see softness in both new loan demand and revolver utilization in part due to clients’ access to receptive Capital Markets. In multifamily, while we are seeing encouraging signs in loan originations as long-term rates fall, we expect overall growth to remain muted in the near term as originations are offset by pay-off activity.”
• Bank of America ($332.6B): “With respect to what we see in our commercial businesses, it is consistent with a lower growth economy. Line of credit usage rates remain lower than pre-pandemic levels. This does not surprise us with the dramatic increase in the cost of borrowing for small- and medium-sized businesses. They want to grow; they are simply being more careful and worry if final demand will hold. Therefore, they are being cost conscience across the board. In our Global Banking business, we saw loan demand start to pick up late in the quarter.“
• Wells Fargo ($211.6B): “Based on the conversations our teams are having with clients, I think people are still being very prudent about borrowing. I think the 50 bps reduction is helpful but not by itself a factor that will drive people to borrow or not. I think they’ll need to see that come down more meaningfully if that’s the driving force. The uncertainty around the election, the uncertainty around the macro backdrop, I think as people get more confidence, that base line case of a soft landing will materialize. You get past the election, you see rates come down a little bit, I think all those things will come together and help give clients more confidence about either building inventories or making further capital expenditures that they’re holding off on now.”
• PNC Financial Services Group ($76.2B): “All year, we’ve yet to deliver the loan growth that we thought was coming at some future point, and for all the obvious reasons that you’ve seen, utilization is low. And there is a bit of a pause feeling, obviously, with the election coming up and the rate environment. What we point to on the constructive front is we do continue to add customers. We do continue to add loan commitments QoQ. So, our commercial clients are putting those lines in place with the anticipation of borrowing.So, that’s a constructive sign. And then, you’ve seen the low inventory levels, the low CapEx to sales levels. So, it does feel as though we’re at the point of the cycle to where loan growth is not too far off.”
• First Horizon ($9.3B): “The loan growth in the marketplace is somewhat muted at this point. It has not picked up. I couldn’t tell you how to weight the parts, but I suspect some part of it is what happens in the elections that are coming up in the next month. It’s partly weighted on what the Fed is going to do with interest rates and, in particular, when deals start to look better financially. And then, just overall, are we going to have a soft landing or something else. And I’m somewhat optimistic that we get through the next 90 days, we’ll have greater clarity maybe on all three of those. And if we do, I think, there’s some pent-up loan demand. At least, we hear that in our customer conversations.”
• Fulton Financial ($3.4B): “On the loan growth side, we expect to continue to have modest loan growth as we look forward. Our pipelines and originations are consistent, but we are in a low growth environment. Customers continue to be cautious as we move forward. So, we feel good about our organic business. But where we are in this environment and cycle, we expect kind of that low-single-digit loan growth to continue.”

Bullish Sentiment as Investment Banking Profits Rise, Driven by Opportunistic M&A and Increased Debt Capital Markets Activity; Optimism Remains for IPO and M&A Resurgence with Sponsors Sitting on $1T+ of Dry Powder

• Citigroup ($122.1B): “It was a particularly pleasing quarter in Banking. Despite the muted IPO market, Investment Banking fees are up 44%. That’s driven by investment grade debt issuance as our clients pulled forward activity ahead of the U.S. election. Corporate sentiment remains positive as boards pursue strategic transactions such as the $36B Mars acquisition of Kellanova where we are the sole advisor and the lead financier.”
• Goldman Sachs ($165.0B): “Equity underwriting revenues rose 25% YoY to $385M, as equity capital markets have continued to reopen, though volumes are still well below longer term averages. Debt underwriting revenues rose 46% YoY to $605M amid higher leveraged finance and investment-grade activity. We are seeing increased client demand for committed acquisition financing, which we expect to continue on the back of increasing M&A activity. Overall, our investment banking backlog rose QoQ, driven by advisory.”
• Morgan Stanley ($193.5B): “As you know, the sponsors have roughly $1.3T of dry powder. They have $3T to $4T of portfolio companies in the ground by some measures; 10,000 companies in the ground and for the first time in close to 15 years there, the deployment is outpacing the fundraising. So, there is a need for that group to move. I’m bullish on IPOs and M&A coming back. It may take some time. And the size of the companies when they come will likely be larger. So, there’ll be slower unit volume than the sort of the heyday of post-COVID stimulus and quick listings. But I think these are going to be global mature companies, which are going to very much need our advice.”
• KeyCorp ($16.2B): “The private equity universe is really starting to transact. They have a perspective. Obviously, there’s an inverse relationship between the hold period and the returns. And in addition to that, with the tenure, which is really what matters, settling in somewhere around 4%, that’s in an environment where the private equity world is very comfortable transacting. And, as a consequence, you’re really starting to see a pickup on the M&A side and that will continue, by the way.”

Execs Continue to Highlight Technology Investments and Opportunities to Drive Efficiency; While Some Focus on Successful AI Use Cases, Still Seen as Early Days, Especially Generative

• US Bancorp ($73.3B): “We invest $2.5B a year in technology and technology initiatives. We did a great job with the digital capabilities. We highlighted those at Investor Day and we’re following that same model with the AI initiatives, which is the center of excellence, and then the business line surrounding them in terms of use cases. As we talked about, we have a number of use cases underway. I would say traditional AI we’ve been doing for a while. Generative AI is in the early innings and what’s important is we have a structure, expertise, leadership and technology to deliver on it. But it is early innings.”
• JPMorgan ($617.0B): “We have very huge opportunities for innovation economy that takes bankers and certain technology stuff like that. Our goal is to gain share and everything we do, we get really good returns on it. So I look at that, these are opportunities for us. These are not expenses that we have to actually punish ourself on. And we do get, and we show you kind of extensively cost and productivity on various things. And also, AI [expense] is going to go up a little bit and I would put that as a category that just is going to generate great stuff over time.”
• Morgan Stanley ($193.5B): “Where we are really digging in as a proprietary matter is around the productive efficiency inside of Wealth Management. The AI @ Morgan Stanley Assistant is just the first chapter of what we’re going to do across the financial advisor platform specific to our own offering with clients where we think we’re going to have some real edge. It’s going to be a tool at the very least that is going to help inform financial advisors on what is relevant at any given moment, under any given paradigm. They are going to have access to information across a whole bunch of data sets, ongoing conversations and interactions that are going to allow for crisper and more effective conversations with their clients. I think that will take some time to play out.”