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Analysts and investors gained insight into what may lie ahead in the recent round of first-quarter earnings reports, which revealed a fair degree of optimism balanced by caution, as senior executives set the tone for the rest of the year.
Credit card giant Discover Financial Services laid the groundwork for a proposed merger with Capital One Financial by deducting nearly $800 million from first-quarter profits to cover the costs associated with a merchant fee-pricing issue from previous years. While the liability is more than double what the firm originally estimated in July 2023, Discover's Chief Financial Officer John Greene saw positives in revenue of $4.2 billion that was higher than anticipated.
Credit card losses coupled with bad office loans played a key element in Bank of America's report card. Profits dipped as the bank sought to build a cushion for net charge-offs that reached $1.5 billion at the end of the quarter by posting a $1.3 billion provision for the losses. Despite the rise in charge-offs, David Fanger, senior vice president of the financial institutions group at Moody's, described the bank's credit performance in the first quarter as "resilient."
Morgan Stanley was another firm to demonstrate positivity in the face of business challenges after a first quarter that saw a record $6.9 billion in net revenue in wealth management, despite various federal agencies probing the unit for potential money laundering issues.
In response to an analyst's question about whether the investigations would alter the business strategy around wealth management, CFO Sharon Yeshaya said they wouldn't. "This is a phenomenal business … and we're in a great position," she said. "There are no changes in our ability to do business, and we're extremely confident in our ability to grow and to deepen the relationship with the breadth of firm offerings that we have to serve our clients."
At JPMorgan Chase, last quarter's investment banking results marked progress in rebounding from a slump in the sector. About a year and a half ago, the nation's largest bank by asset size said that it was considering reducing headcount and pay in its investment banking business.
During a call with reporters in April, CFO Jeremy Barnum broke down JPMorgan's investment banking performance across different products. He said that the narrative around initial public offerings has "changed to a meaningful degree this quarter," and the bank has started to see more promising performance after some disappointing results.
Citigroup CFO Mark Mason sounded a similar optimistic note in his first-quarter report to analysts when announcing the firm's forecast downturn in expenses, which could arrive two quarters earlier than Citi executives had previously predicted. Boosting revenue may not be as easy, but Mason sees "flexibility" in having an expense target range of between $51 billion and $53 billion.
At the same time, "we've got a mix of businesses that I think we've demonstrated resiliency around … and we expect for those to continue to drive some top-line momentum," Mason said. "But we've got levers in case they don't."
Catch up on these stories in our roundup of first-quarter earnings report news.
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'Solid' results buoy Discover, despite millions assigned to overcharge liability
Michael Shepherd, interim CEO of Discover, told analysts during the firm's April earnings call that results were "solid" for the first quarter due to expanding receivables and improving credit quality. The firm, however, had to subtract $799 million from Q1 profits to cover costs to fix a miscategorization error from years ago that led to overcharging certain merchants and acquirers from 2007 through last year.
The credit card giant initially indicated when it revealed the missteps in July of 2023 that its liability for funds owed to merchants and acquirers would be about $365 million. "After extensive discussions with several constituencies, including merchants and regulators, Discover decided to significantly increase our liability for the card misclassification issue," said Shepherd during the call.
Due to the funds set aside for the merchant issue, Discover's net income for the quarter ended Jan. 31, 2024, was $309 million, down 68% from the same period a year earlier, said John Greene, Discover's chief financial officer. Revenue was $4.2 billion, beating analysts' expectations.
Credit card and office loan losses fail to dampen enthusiasm at Bank of America
Bank of America reported that its net charge-offs increased by more than 80% in the first quarter from the same period last year, from $807 million to $1.5 billion, as consumers struggled to pay off their credit card debt and the bank faced continued turbulence in the commercial real estate sector. To manage the rising credit risk, the bank posted a $1.3 billion provision for credit losses, up from $931 million a year earlier.
"All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls," Chief Financial Officer Alastair Borthwick told analysts during the bank's quarterly earnings call in April.
The firm pulled in net income of $6.8 billion last quarter, down from $8.2 billion in the first quarter of 2023, dampened in part by the credit-loss provision and a special assessment from the Federal Deposit Insurance Corp. related to bank failures last spring.
Full steam ahead for Morgan Stanley despite regulatory scrutiny
Morgan Stanley CEO Ted Pick reported record revenue of $6.9 billion in the firm's wealth management business during the company's first-quarter earnings call, as well as strong margins and a boost in net new assets.
However, Pick played down a Wall Street Journal report on the existence of multiple investigations into how the investment bank vets prospective clients and the source of their wealth, saying that the firm has "been spending time, effort and money" on the issues for many years.
"This is not a new matter," Pick told analysts. "We've been focused on our client onboarding and monitoring processes for a good while."
Wealth management has been critical to Morgan Stanley's business model since the 2008 financial crisis. Last year, the unit reported net revenues of $26.3 billion, nearly half of the firm's total net revenues of $54.1 billion.
'Green shoots' emerge for investment banking at JPMorgan Chase and Wells Fargo
The beginnings of a recovery in investment banking are on the way for JPMorgan Chase and Wells Fargo after the slump that hit the entire industry last year.
JPMorgan Chase raked in $2 billion of investment banking revenue during the first quarter, up 27% year-over-year, as it took advantage of fees from equity and debt market activity. "We were happy to see the good results in investment banking this quarter, quite strong," Chief Financial Officer Jeremy Barnum said in April during a call with reporters.
Meanwhile, Wells Fargo CFO Mike Santomassimo said all of its investment banking products saw increased activity during the first quarter, earning $474 million in revenue, up 24% from the previous quarter.
"Our results benefited from the areas where we have had strength for some time such as investment-grade debt capital markets and from the talent we've been attracting into the business," Santomassimo said. "While it is still early, we are encouraged by the green shoots we're seeing."
Citi may get a boost from an early downturn in expenses
Citigroup's annual expenses are forecasted to decline in the second quarter and then to decrease sequentially for the rest of the year, Chief Financial Officer Mark Mason told analysts in April. That means the downturn in expenses could arrive two quarters earlier than Citi executives had previously predicted.
But whether the $2.4 trillion-asset company will be able to simultaneously boost revenues remains to be seen, in part because of the underperformance of its wealth management unit. On a call following the release of Citi's first-quarter earnings report, bank analyst Jim Mitchell of Seaport Global wanted to know whether Citi has the flexibility to reduce expenses by even more if firmwide revenues fall short of the targeted compound annual growth rate of between 4% and 5% through 2026.
In short, the answer is yes, Mason said. If there's "softness in revenues," Citi can further rein in spending, though it has no plans to cut back on any spending related to its multiyear risk management overhaul, Mason said. The "flexibility" comes from having an expense target range of between $51 billion and $53 billion, he added.
The Long Island bank is the latest financial institution to use new equity to restructure its balance sheet and unload low-yielding assets. Its stock price tumbled after the shares were priced at a considerable discount.
Affirm partners with Sixth Street to sell its buy now/pay later loans to the investment firm; Associated Banc-Corp promotes Steven Zandpour to deputy head of consumer and business banking; Visa Direct speeds up its money transfers; and more in this week's banking news roundup.
Banks will feel the fallout from a court's decision to strike down a Nasdaq rule that would have mandated more disclosure about the racial and gender composition of corporate boards.
The bank said it redeployed proceeds from the sale into high-yielding investments. It also said it would end an employee pension plan to curb expenses.
A close result was complicated by an hour-long adjournment of the New York-based company's annual meeting that angered dissident investors and left them mulling legal action.
