JPMorgan, BofA, Citi killed by Bad loans. HOLD the Buys?
Optimism in the US banking industry is being threatened by a growing pile of bad loans, is putting pressure on banking sector’s biggest players.
Bloomberg analysts say non-performing loans (NPL), or loans to debtors that haven’t made a payment in >90 days, rose to a combined $24.4 Billion in the last quarter of 2023 for JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, reports the Financial Times.
The numbers represent a $6 Billion increase year over year.
(1) JPMorgan’s non-performing loans.
JPMorgan FY 2022 - Non performing loan ($2.94 Billion)
In its recent released Q4 2023 earnings, JPMorgan alone accounts for 28.36% of above total combined non-performing loans.
It reported Total Non-Performing Loans: $6.92 Billion versus the three-analyst average estimate of $6.90 Billion.
Looking at JPMorgan’s non-performing loans chart (see above), it has been “quietly” gathering pace since FY 2021.
(2) Bank of America’s non-performing loans.
Similarly, $Bank of America(BAC)$ that has reported its Q4 2023 earnings on 12 Jan 2024, its non-performing loans has ballooned to 5.63 Billions (or 23.07% of above 4 banks’ NPL).
BofA FY 2022 - Non Performing loan
Looking at BofA’s non-performing chart, it too has also been trending up in stealth since FY 2021.
Based on Wall Street analysts, bank overall earnings likely shrunk in the final three months of 2023 due to (a) the unpaid loans, (b) plus the rising cost of deposits stemming from higher interest rates.
Reuters reports that the banks are taking several cost-cutting measures to deal with the new business climate.
Citigroup is reportedly taking a hit to deal with layoffs and related expenses (see above), while Wells Fargo has already set aside $1 Billion for severance packages.
US Top 6 Banks - staff movement Q4 2022 to Q4 2023
Staff layoffs at banks will continue while remaining US banks proceed with their Q4 2023 earnings reporting.
Both $Morgan Stanley(MS)$ and $Goldman Sachs(GS)$ are due to announce their results on Tue, 16 Jan 2024.
Despite the rise in bad loans, the biggest banks in the US have signaled that they’re expecting a shift in trend by reducing how much capital provisions they set aside for future non-performing loans.
Former Deputy Director at IMF’s Policy Development & Review Department, Desmond Lachman, recently said regional banks are also in a precarious position, with about 18% of their loan portfolios in the troubled commercial real estate industry.
Says the IMF insider — “Major property investors, such as $Brookfield Asset Management(BN)$ and Blackstone, are starting to walk away from their mortgages, Lachman noted.
The scenario makes it more likely that commercial property owners will, possibly by next year, start defaulting on their loans. That would be very bad news for small and mid-size banks.”
In Q3 2023, reports surfaced that US banks were facing “charge-offs,” or losses on loans that have been designated as unrecoverable at a 17% higher rate than the previous three months, and a 75% higher rate than 2022.
My Viewpoints: (mine & mine only)
American "hire & fire" policies act as a blunt barometer of corporate performance: booming economies see hiring sprees, while downturns trigger cutthroat layoffs.
It is telling as financial institutions continue to lay off staff even in 2024. Agree?
FDIC - Special Levy.
Another potential dampener at 2024’s not too distant horizon is the “special levy” to the Federal Deposit Insurance Corporation (FDIC) by end 2024.
The special levy will be used to plug the shortfall in the insurance fund of $18.5 Billion dollars, that was caused by the collapses of Silicon Valley Bank and Signature Bank in March 2023.
With payments due to commence from Q2 2024 and collection conducted over 2 years, this translates to an annual rate of 0.125% of each bank's uninsured deposits.
Above are the “approximate estimates” of special levy each US financial institution has to expend over two years.
Banks like BofA is likely to be disproportionately impacted by the special levy given its disappointing Q4 2023 quarterly earnings.
A “future” policy in the making may impact US banks to a large extent. (see above)
In the aftermath of March 2023 banking debacle, the Office of the Comptroller of the Currency, the Fed and FDIC have a proposal would improve the calculation of risk-based capital requirements to better reflect the risks of US banks' exposures.
The extended comment period expires on Tue, 16 Jan 2024.
Should the new capital requirement get enacted.
The benefits include:
(1) Enhanced Stability:
Stronger balance sheets: Higher capital levels improve the ability to absorb losses and withstand financial shocks, strengthening the banking system as a whole.
Reduced systemic risk: Increased resilience of large banks decreases the likelihood of financial crises and potentially prevents future taxpayer bailouts.
Greater public confidence: A more robust banking system could boost public trust and confidence in the financial sector.
(2) Increased Costs:
Higher capital requirements: Banks will have to hold more capital against their assets, raising their cost of doing business. This could lead to:
Slower loan growth: Lending might become more selective or expensive, potentially dampening economic activity.
Reduced profitability: Lower returns on equity due to increased capital holdings.
Reduced dividends: Banks might choose to retain more earnings to meet capital requirements, impacting shareholder payouts.
(3) Banks’ impact:
The impact will vary significantly across different banks depending on:
Current capital levels: Banks with lower capital ratios will be more affected.
Business composition: Banks heavily reliant on lending will face higher costs compared to those focused on other activities.
Risk profile: Banks with riskier assets might need to hold even more capital.
(4) Other Potential Impacts:
Changes in business models: Banks might shift towards less capital-intensive activities or explore non-traditional funding sources.
Competitive landscape: Smaller banks, with lower capital requirements, could gain a competitive edge in certain segments.
Technological innovation: Increased reliance on technology for risk management and capital optimization might be encouraged.
Parting thoughts:
US banking landscape in 2024 remains challenging as ever. In 2023 it was haunted by the possibility of recession.
In 2024, the impact of less working capital will emerge to be the main distraction, while recession remains a background tune,
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