Economic Slowdown: Impact on U.S. Banks

Loan Performance and Credit Quality

Loan performance and credit quality in U.S. banks have shown mixed trends. Wells Fargo reported a decline in commercial net loan charge-offs, while JPMorgan Chase emphasized internal risk ratings as key indicators. Bank of America adjusted its reporting to better reflect ongoing credit quality, and Goldman Sachs employed various risk mitigants based on borrower credit quality.

"Credit performance trends were consistent with what we saw last quarter. The decline reflected lower commercial net loan charge-offs, which were down $131 million from the fourth quarter to 25 basis points of average loans." --- (WFC, earning call, 2024/Q1)

"The primary credit quality indicator for wholesale loans is the internal risk rating assigned to each loan." --- (JPM, sec filing, 2024/Q1)

"n/m = not meaningful We believe that the presentation of information adjusted to exclude the impact of the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business." --- (BAC, sec filing, 2024/Q1)

"For loans and lending commitments, depending on the credit quality of the borrower and other characteristics of the transaction, we employ a variety of potential risk mitigants." --- (GS, sec filing, 2024/Q1)

"Average loans outstanding increased by 2% from a year ago with growth in the first half of the year offsetting declines later in the year reflecting weaker loan demand as well as credit tightening actions." --- (WFC, event transcript, 2024/04/30)

Consumer Banking and Retail Lending

Consumer loans have declined, particularly in residential real estate and home equity, as noted by PNC. Citigroup is taking strategic actions to navigate economic headwinds and enhance retail banking value. Wells Fargo is downsizing its home lending business due to regulatory and capital challenges. Bank of America reports past due consumer loans, indicating stress in retail lending.

"Average consumer loans declined approximately $600 million or less than 1%, driven by lower residential real estate and home equity loan balances." --- (PNC, earning call, 2024/Q2)

"We feel good about our position as a prime and lend-centric issuer. We will continue to take mitigating actions to manage through the headwinds, [lap] (ph) the credit cycle, and drive more value from retail banking and retail services, while improving the overall operating efficiency of the business, all of which will ultimately result in a higher returning business over the medium-term." --- (C, earning call, 2024/Q1)

"(4) Excludes consumer loans accounted for under the fair value option. At both March 31, 2024 and December 31, 2023, $4 million of loans accounted for under the fair value option were past due 90 days or more and not accruing interest." --- (BAC, sec filing, 2024/Q1)

"We made the decision to significantly downsize the business and focus on serving customers who have a broader relationship with Wells Fargo, while continuing to provide support for underserved communities. Our decision reflects our belief that much has changed regarding regulation, capital requirements and reputational risk for large banks who operate large home lending businesses, as well as the different standards in the space for smaller banks and non banks." --- (WFC, event transcript, 2024/04/30)

"Succession plan allows for smooth transition and continued focus on consumer and business banking clients U.S. Bancorp (NYSE:USB), parent company of U.S. Bank, announced today that Tim Welsh, vice chair of Consumer and Business Banking, intends to leave the organization after seven years to focus on his many community activities and additional career interests." --- (USB, press release, 2024/06/27)

Interest Rate Impacts on Profitability

Higher interest rates impact U.S. banks' profitability by increasing sensitivity to economic conditions (WFC), necessitating strategies to manage exposure (JPM), and presenting ongoing risks (MS). Changes in rates affect growth, savings, and profitability (GS), while revenue growth is driven by increased Net Interest Income (C).

"So therefore the impact of higher rates does have an impact on that. Our business does remain sensitive to interest rates and I would say just the overall health of the U. S.Economy." --- (WFC, event transcript, 2024/04/30)

"We have ongoing concerns about persistent inflationary pressures and consider wide range of outcomes to manage interest rate exposure and other business risks." --- (JPM, event transcript, 2024/05/21)

"However, geopolitical risks, inflation and uncertainty regarding the U.S. political cycle and the future path of interest rates, which have remained high relative to recent years, present ongoing risks to the economic environment." --- (MS, sec filing, 2024/Q2)

"Statements about the projected growth of our deposits and other funding, asset liability management and funding strategies and related interest expense savings, and our platform solutions business, are subject to the risk that actual growth, savings and profitability may differ, possibly materially, from that currently anticipated due to, among other things, changes in interest rates and competition from other similar products." --- (GS, sec filing, 2024/Q1)

"Now looking at the right side, we show our total revenue over the past 3 years illustrating how revenue growth was driven by an increase in NII from both interest rates and volume particularly in services and USPB." --- (C, Investor Day, 2024/06/18)

Capital Reserves and Liquidity Management

U.S. banks like Citigroup, Bank of America, Morgan Stanley, JPMorgan Chase, and Wells Fargo emphasize robust capital reserves and liquidity management. They maintain high levels of capital and liquidity, manage liquidity risks effectively, and ensure their policies are overseen by senior management and relevant committees to support their operations under various economic conditions.

"We have a diversified business model, and we have high levels of capital, liquidity and credit reserves." --- (C, Investor Day, 2024/06/18)

"Liquidity Risk Funding and Liquidity Risk Management Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral requirements, including payments under long-term debt agreements, commitments to extend credit and customer deposit withdrawals, while continuing to support our businesses and customers under a range of economic conditions." --- (BAC, sec filing, 2024/Q2)

"March 2024 Form 10-Q Management’s Discussion and Analysis Liquidity and Capital Resources Our liquidity and capital policies are established and maintained by senior management, with oversight by the Asset/Liability Management Committee and the Board." --- (MS, sec filing, 2024/Q1)

"LIQUIDITY RISK MANAGEMENT Liquidity risk is the risk that the Firm will be unable to meet its cash and collateral needs as they arise or that it does not have the appropriate amount, composition and tenor of funding and liquidity to support its assets and liabilities." --- (JPM, sec filing, 2024/Q1)

"We have strong capital and liquidity positions. As we're building many of our businesses, we have done so within a consistent level of risk appetite, and our business model and franchise value differentiates us from most of who we compete with regardless of the environment." --- (WFC, earning call, 2024/Q1)

Investment Banking Activities

Despite the economic slowdown, U.S. banks are experiencing strong growth in investment banking activities, driven by corporate finance, investment grade debt issuance, and improved market conditions. This trend is evident across major banks like Morgan Stanley, Citigroup, and Wells Fargo, indicating resilience and potential for continued growth in the sector.

"asset managers and asset owners around the world. We expect the next economic and financial cycle to be led by corporate finance activity across industries and regions, which will drive Investment Banking growth." --- (MS, event transcript, 2024/05/23)

"The rebound in banking gained speed during the quarter, led by near record levels of investment grade debt issuance, as improved market conditions enabled issuers to pull forward activity. And after a bit of a slow start, ECM picked up in the second half of" --- (C, earning call, 2024/Q1)

"While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year.In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth." --- (WFC, earning call, 2024/Q2)

"And then on the commercial side, there's opportunities with investment banking." --- (BAC, conference, 2024/06/11)

"And that is creating an ecosystem of activity in our investment banking and markets business that we've seen in the context of other areas of significant shift or macro expansion over a long period of time." --- (GS, earning call, 2024/Q1)

Regulatory Responses and Implications

U.S. banks are grappling with significant regulatory uncertainties amid the economic slowdown. Citigroup highlights the uncertainty of forthcoming regulatory changes, while JPMorgan Chase focuses on navigating these challenges. Goldman Sachs warns of underestimating the impact of new rules, Wells Fargo implements heightened controls, and Morgan Stanley notes ongoing regulatory uncertainty around Basel and CCAR.

"And a lot of that is to do with the uncertainty about the forthcoming regulatory changes." --- (C, earning call, 2024/Q2)

"While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical, and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges, as well as any others that may come our way. And with that, let's open up the line for Q&A." --- (JPM, earning call, 2024/Q1)

"As a consequence, we may underestimate the actual impact of the final rules (including any final rules in respect of the July 2023 proposal from the U.S. federal bank regulatory agencies)." --- (GS, sec filing, 2024/Q1)

"Additionally, as we implement heightened controls and oversight, new issues could be found and these may result in regulatory actions." --- (WFC, earning call, 2024/Q1)

"And then third, the buyback opportunistically. Down the road, two, three, four years out, if opportunities come across the horizon, importantly after we have some definition around Basel and continued potential refinement of what we understand to be inside CCAR formulation, so just general regulatory uncertainty, sure, we might look at stuff. But I would tell you in the short-term, we're very happy with the acquisitions that we've made over the last 10 years, 12 years." --- (MS, earning call, 2024/Q2)

Technological Adaptation and Operational Efficiency

U.S. banks are increasingly leveraging cloud technology and AI to enhance operational efficiency. JPMorgan Chase emphasizes cloud integration, while Morgan Stanley highlights AI's role in streamlining processes. Wells Fargo, Goldman Sachs, and Citigroup focus on expense flexibility and productivity improvements to drive efficiency gains.

"Elevating this position to the operating committee level reflects how critical this function will be going forward and how serious we expect IH to influence our business.2nd, getting our technology to the cloud, whether the public cloud or the private cloud is essential to fully maximize all of our capabilities, including the Power BI data." --- (JPM, event transcript, 2024/05/21)

"Ebrahim Poonawala: Understood. And then just moving to expenses. So I get the expense guide increase, but remind us, has anything changed maybe, Charlie, from you first on the expense flex that's a big part of the wealth thesis around efficiency gains, which should lead to the path for that 15% ROTCE?" --- (WFC, earning call, 2024/Q2)

"And you can think about the efficiencies associated with using AI to break down some of the classic infrastructure controls, so that as long as there are high quality eyes on top of the technology development, you can be in a cycle where you're beginning to be able to process more faster through the pipes, knowing that you're going to have AI as something that will, over time, relieve some of the SG and A pressure." --- (MS, conference, 2024/06/10)

"We are focused on enhancing productivity, particularly for our developers, and increasing operating efficiency while maintaining a high bar for quality, security, and controls." --- (GS, earning call, 2024/Q1)

"These drivers will underpin our path to $51,000,000,000 to $53,000,000,000 of expenses subject to volume related expenses over the medium term period.Looking at capital on Slide 13, capital optimization and efficiency remain a top priority in reaching our medium term targets." --- (C, Investor Day, 2024/06/18)

Future Outlook and Strategic Planning

U.S. banks are maintaining their strategic plans despite economic slowdowns. JPMorgan Chase and Citigroup emphasize consistency in their strategies, while Goldman Sachs highlights board oversight in strategic planning. Morgan Stanley focuses on strategic investments for growth, and Wells Fargo prioritizes industries with existing strengths.

"I just don't see us fundamentally making strategically different decisions if the strategic outlook is unchanged simply because of the business cycle in the short term. Glenn Schorr: Awesome. Thank you. Jeremy Barnum: Thanks." --- (JPM, earning call, 2024/Q1)

"The Board reviews our strategic business plan and is ultimately responsible for overseeing and providing direction about our strategy and risk appetite." --- (GS, sec filing, 2024/Q1)

"Strategic investment is expected to accelerate Sokin's product growth plans and further global expansion Additional investors include Gary Marino, former CCO at PayPal who will join the Board, Mark Britto, former CPO at PayPal, and Aurum Partners, the investment fund affiliated with the owners of the San Francisco 49ers and other strategic LPs Existing investors include Rio Ferdinand, former England and Manchester United defender Investment funds managed by Morgan Stanley Expansion Capital have acquired a stake in UK headquartered payments business Sokin, marking an exciting new chapter for the fast-expanding fintech firm." --- (MS, press release, 2024/07/24)

"And so when we look across coverage in the equity space by industry on the strategic side and how that relates to our existing high quality debt platform that we have, again, we're prioritizing industries based upon where we already have strength in relationship and where there are significant wallets." --- (WFC, earning call, 2024/Q1)

"And that way, we are delivering for our shareholders as well as our regulators and our clients because we're putting in strategic solutions that will benefit all, but I'm not expecting this to change the timeframes. Vivek Juneja: Thank you." --- (C, earning call, 2024/Q2)