One Major Factor Derailed Big-Bank Earnings in Q4

If banks are a key bellwether for the economy and earnings season, then be prepared for a mixed bag to start the year. The four biggest U.S. banks reported their fourth-quarter earnings on Friday, and three of them missed earnings estimates, driving the markets down on Friday.

JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) all fell short of estimates, with only Wells Fargo (NYSE:WFC) beating Wall Street projections. They also all saw their stock prices drop, with Bank of America down 3.9%, Wells Fargo dropping 3.2%, Citigroup down 2.9%, and JPMorgan Chase off 0.5%, as of Friday afternoon.  

However, the real performance of the mega-banks requires a deeper dive into their earnings reports because the overall performance was not as bad as it seemed on the surface. In fact, they all were dragged down by one major expense.

JPMorgan Chase and Wells Fargo post solid numbers

While JPMorgan missed estimates, the report was a little deceiving. The nationʻs largest bank posted $39.9 billion in revenue for the fourth quarter, up 12% year over year, and $9.3 billion in net income or $3.04 per share, down 15% year over year.

However, those numbers included a one-time $2.9 billion charge from the Federal Deposit Insurance Corp. that large banks were directed to pay to shore up the Deposit Insurance Fund during the banking crisis. That proved to be a huge drag on earnings, as without it, JPMorgan’s net income was $12.1 billion, or $3.97 per share, which would have easily beaten estimates.

For the full year, JPMorgan Chase generated $158 billion in net revenue, up 23% over the previous year, and $49.6 billion in net income, up 32% year over year. The $49.6 billion in net income was an all-time record for the company.

“Our balance sheet remained extremely strong, with a CET1 ratio of 15.0%, a staggering $514 billion of total loss-absorbing capacity and $1.4 trillion in cash and marketable securities,” CEO Jamie Dimon said in the earnings report.

Wells Fargo beat estimates with $20.5 billion in revenue in the quarter, up 2% year over year. Its net income was also better than anticipated, coming in at $3.5 billion in the quarter or 86 cents per share, up 9% from the fourth quarter of 2022. These gains came despite a $1.9 billion special assessment from the FDIC, which proved to be a 40-cent-per-share drag on the bank’s earnings.

For the full year, Wells Fargo recorded $82.6 billion in revenue, up 11% from 2022, while its net income climbed 39% to $19.1 billion, or $4.83 per share.

However, the bank’s stock price dropped on Friday after officials warned that interest-rate cuts in 2024 could result in net interest income that is 7% to 9% lower in 2024 compared to 2023, according to Barronʻs.

“As we look forward, our business performance remains sensitive to interest rates and the health of the U.S. economy, but we are confident that the actions we are taking will drive stronger returns over the cycle. We are closely monitoring credit and while we see modest deterioration, it remains consistent with our expectations,” CEO Charles Scharf said in Wells Fargo’s earnings report.

Bank of America and Citigroup fall short of estimates

While Bank of America and Citigroup were hurt by the same special assessment that JPMorgan Chase and Wells Fargo faced, they were both hampered by other issues as well that caused them to miss earnings estimates.  

Bank of America generated $22 billion in net revenue in the quarter, down 10% year over year, while its net income fell 56% to $3.1 billion, or 35 cents per share. A major cause was the $2.1 billion FDIC special assessment, but it also got hit with a one-time $1.6 billion charge related to its transition away from the Bloomberg Short-Term Bank Yield (BSBY) index. The combined charges resulted in a 35-cent-per-share drag on earnings.

For all of 2023, Bank of America generated $98.6 billion in revenue, up 3.8% from 2022, and net income of $26.5 billion or $3.08 per share, down 3.6% from 2022.

Finally, Citigroup had a difficult quarter with its revenue down 3% year over year to $17.4 billion and a net loss of $1.8 billion, down from net income of $2.5 billion in Q4 of 2022.

Citigroup was hit with a $1.7 billion FDIC special assessment, but it also had a slew of other issues dragging it down. Namely, it had a reserve build of $1.3 billion associated with transfer risk in Russia and Argentina; an $880 million revenue hit from the devaluation of the Argentine peso; and a $780 million restructuring charge.

Combined, these items negatively impacted the firm’s earnings per share by approximately $2. Without them, Citigroup would have recorded EPS of 84 cents per share.

For 2023, the firm’s revenue was up 4% to $78.5 billion while its net income was down 38% compared to 2022 to $9.2 billion.

“Given how far we are down the path of our simplification and divestures [sic], 2024 will be a turning point as we’ll be able to completely focus on the performance of our five businesses and our transformation,” CEO Jane Fraser said in the earnings release. 

After posting its earnings, Citigroup also announced that it was eliminating 20,000 jobs between now and the end of 2026 as it executes on its reorganization plan, reported Reuters.

Thus, while the numbers don’t look great and the outlook is a little iffy, the Q4 results for banks were not as bad as they might appear at first glance.