Strong end to 2019 for the big American banks

• Overview of the latest results of the top banks of America
• Analysis of individual performance of the American banks
• Road ahead for the American banks

2019 was a tumultuous year for the United States but not for the American banks, which had a blast. After a disappointing performance in 2018, America’s top banks – JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs (excluding Wells Fargo and Bank of America) delivered their best fourth quarter results in more than a decade (2008 pre-financial crisis period). America’s largest banks announced their results recently and all reported increased profits and revenues for 2019, in a year where there were many interest rate cuts. Much of the gains for these banks were driven by increased operations especially with the rise in the mortgage volumes. Non-lending activities also contributed to the earnings, compensating the lower profits from the lending business due to the cut in the interest rates by the government, except for Wells Fargo which is still recovering from the series of legal charges and issues.

JP Morgan reported a 21% rise in its earnings to $8.52 billion, while its revenue climbed 9% to $28.3 billion. Both the Asset & Wealth Management and Corporate & Investment Bank segments of JP Morgan Chase & Co. posted huge net income growth (YoY) of 30% and 48%, respectively, which contributed to the bank’s strong fourth-quarter earnings. The growth in the Corporate & Investment Bank division was driven mainly by higher debt and equity underwriting fees, along with the strong business in its securitized products and rates which were driven by strong client activities and monetizing flows. As for the Asset & Wealth Management segment, higher investment valuations as well as growth in the deposits and loans drove the segments growth. The bank also saw increase in the Consumer & Community Banking segment which was the result of rise in credit card spending by customers led by the strong holiday sales in the United States.

Citigroup delivered a 16% YoY increase in its net income for the fourth quarter of 2019, with strong results across both its business segments of Institutional Clients Group and Global Consumer Banking. The main driver of growth was its huge contribution of revenue from its fixed income market revenues which registered a 49% YoY increase in the fourth quarter of 2019. The company also reported a rise in revenue from its credit card business which reported a 10% growth in the revenue. The strong result was however slightly offset by the 23% decline in equity trading because of the more challenging derivative market.

Morgan Stanley reported a surge in the banks’ profits by 46% YoY in the fourth quarter of 2019 while its revenue climbed 27% in the same quarter. Investment Management business of Morgan Stanley stood out exceptionally well, delivering a 98% YoY increase in the fourth quarter of 2019 as compared to that of the same quarter in the previous year. This was driven by higher asset under management on account of strong net flows and higher performance fees. Besides, the banks other segments – Institutional Securities and Wealth Management also performed strong with both the segment delivering higher revenues. Higher underwriting revenues along with increase in fixed income sales and trading was the main contributor to the growth of the segment.

Goldman Sachs, notwithstanding its recent scandal associated with the 1Malaysia Development Berhad (1MDB), reported one its best fourth quarterly revenue in 2019, highest since 2007 but took a hit in its profits with its legal bills which cost the company $1.1 billion. The strong quarter results were mainly due to the significantly high contribution from the bank’s fixed income, currency and commodities intermediations and also from its Asset Management business because of higher fees, gains from its debt instruments and impact of higher assets under supervision. Despite the challenging year for Goldman, the firm topped the merger and acquisition activities topping JPMorgan and Morgan Stanley by huge margins by advising some of the biggest tech transactions for 2019 which includes the deals when Salesforce agreed to buy Tableau Software for $15.7 billion, sale of Ultimate Software for $11 billion and the $10.7 billion sale of Symantec to Broadcom.

But it was not the best results for Bank of America and Wells Fargo, two of the other big American banks during the same quarter. The consumer banking giant, Bank of America’s profit fell by 4% YoY in the fourth quarter of 2019 as a result of the rapid decline of interest rate in late 2019. Considering the bank sells a portfolio of consumer banking products with its financials more aligned with short term fixed securities, the impact of the Fed cut in the benchmark interest rates, three times in the last year took a toll on the banks earnings. But the company’s earnings per share were up 6% YoY in the same quarter, helped by a reduction in outstanding shares. Wells Fargo, which in recent years has been struggling to pull itself out from a series of scandals (since 2016), reported a profit drop of 50% YoY in the fourth quarter of 2019. The main reason for this fall was due to the huge legal fees and the low interest rates impacting the company’s financial results. The company reported a $1.5 billion charge for its legal costs alone in the quarter. But the company performed better in the second half of 2019 with its shares recovering during this period. This is also partly due to the positive changes expected at Wells Fargo since the arrival of its new chief executive office in October 2019, boosting the sentiments.

Strong economic conditions played a crucial role in the fourth quarter earnings of 2019 for many of these banks beating estimates despite the challenges they faced with a historically low interest rate, indicating a strong banking industry with the strong US consumer spending playing a center role. Additionally, the anticipation of phase-one negotiations nearing conclusion on the trade accord between the United States and China during the latter part of the fourth quarter also boosted the big bank’s business wherein they cater to the major corporate clients. As was the case in 2019, more rate cuts are predicted for 2020 in the United States by analysts, so the interest rate decline may continue to trim the bank’s lending margins, however the demand for loans will most likely further improve given the state of the interest rate and expectations on smoothening economic conditions in the US against earlier expectations of a moderate decline.