From bearish to bullish: Big banks’ concerns might be getting bigger but they are starting to see a light at the end of the tunnel

From bearish to bullish: Big banks' concerns might be getting bigger but they are starting to see a light at the end of the tunnel

Wall Street banks still have a lot of catching up to do on deposits and investment banking businesses facing a downward slope

by SARA KHAIRI

There hardly seems to be any respite in sight for big banks, Goldman Sachs, Morgan Stanley, and JPMorgan Chase amidst the current macroeconomic climate -- in fact, they may have a lot of catching up to do. But Wall Street banks' CEOs appeared rather hopeful about the market at recent events.

Although the U.S. has seen its share of economic highs and lows in its history, the recent slew of bank failures and a potential credit crunch catalyzed the run on banks with issues like declining deposits and struggling investment banking businesses stemming from it.

Goldman Sachs and Morgan Stanley have been en route a rocky road in their investment banking businesses as volatile markets cut sharply into deal-making businesses since last quarter and the quarter before -- resulting in a deal and funding drought.

Goldman Sachs' investment banking fees plummeted 48% in Q4 2022 from the same period in 2021. Morgan Stanley took the hit as well, with investment banking revenue dropping 49% from a year ago. While Goldman's newly launched credit card business became its redeeming feature, the latter was able to stay afloat due to its wealth management division. 

The peril didn't end there as the economic panic caused by the collapse of banks seeped into the first quarter of this year when banks, on the whole, saw their deposits shrink by $472 billion, three months into 2023, according to the Federal Deposit Insurance Corp. (FDIC) -- which it says is the biggest falloff since 1984.

Around the same time, while Goldman Sachs was facing a blow from the external environment, its internal matters came into question as well. Besides a sharp fall in bond trading, asset and wealth management, and M&A results, Goldman's earnings missed analysts' expectations in April -- net revenue fell 5% to $12.22 billion -- driven by sale write-offs in its consumer business, Marcus. The bank also pivoted away from retail banking by exploring the sale of its fresh acquisition of GreenSky.

Morgan Stanley's overall revenue also got affected in the first quarter as it met with losses in its investment banking and trading sectors -- net revenue was $14.5 billion compared with $14.8 billion a year ago. However, at a recent conference held by Morgan Stanley, the bank's CEO, James Gorman showed optimism about doing deals in asset management and indicated that the firm doesn't feel the need to go down the lay-offs road again -- "It's unlikely we'll be going back to that," he added.

JPMorgan Chase's consumer deposits plunged at the end of Q1 2023, with total deposits held by the bank at $2.4 trillion, down nearly 8% from a year ago. Jennifer Piepszak, co-CEO of JPMorgan Chase’s consumer and community banking unit has predicted that consumer deposits will be “slightly down from here” on account of the Fed’s quantitative tightening program and the Treasury Department planning to make up for the cash in the federal government's operating account after the debt ceiling deal. On the bright side, the bank saw increased account opening activity across its consumer and business banking sector last year amounting to 2 million checking and savings accounts, and expects to gain no less than that this year. 

Goldman Sachs CEO, David Solomon, feels "the U.S. economy has been incredibly resilient over the course of last year". Analogous to Gorman's optimism, Solomon is also pinning his hopes on Goldman's shadow activities resulting in "a little bit more equity issuance, a little bit more leveraged finance activity".

"We’re starting to see some green shoots, and I would expect capital markets activity to pick up as we head into 2024. Now at the end of the day, people need capital. They can defer some of those activities, but at the end of the day, they can’t postpone them indefinitely," he said in a recent CNBC interview.

While CEOs like Gorman and Solomon may be bullish about the market going forward, banks may still have to mend their ways to win back deposits -- as it appears that fintechs are all geared up to cut banks out in seizing their share in the deposit market. Apple, Wise, and fintechs like Robinhood are among the new entrants in the space playing the high-yield game to win depositors from banks amid Fed rate hikes.

Market recap

More gainers and fewer decliners for the fintech IPO Index last week

Upstart (UPST) - up 15% to $37.70 per share

• Upstart's strong Q1 performance and long-term funding arrangement acted as a catalyst in driving the stock higher. The stock has increased by about 180% so far this year.
• The improvement in the inflation rate and the Fed's June rate hike pause also seem to work in favor of the stock.

SoFi (SOFI) - up 18% to $9.55 per share

• Earlier this month, SoFi debuted a tool to help consumers pay off student loans and still save for retirement.
• This offering came on the heels of the resumption of student loan payments and drove the stock higher last week as well.

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Fed, SEC probing Goldman Sachs’s role in SVB’s final days

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The Fed and SEC are investigating Goldman Sachs’s role in factors leading to Silicon Valley Bank’s failure. Silicon Valley Bank had booked a $1.8 billion loss on the sale of a bond portfolio to Goldman, which was also an underwriter for a failed share sale by the bank that eventually paved the way for its meltdown.

The Fed and the SEC are seeking documents related to Goldman's role as both a buyer of the securities portfolio and adviser on the capital raise, to see if Goldman's investment banking and trading divisions were improperly communicating about the portfolio sale.

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Citigroup CFO Mark Mason said the firm’s recent job cuts will cause expenses to climb by as much as $400 million this quarter compared with the first three months of the year.

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Fed holds off on rate hike, but says two more are coming later this year

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The Federal Reserve on Wednesday decided against what would have been an 11th consecutive interest rate increase as it measures what the impacts have been from the previous 10.

But the decision by the Federal Open Market Committee to hold off on a hike at this two-day meeting came with a projection that another two quarter percentage point moves are on the way before the end of the year.

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