The people for whom the tax wrapper is relevant with its future in focus
As we predicted a fortnight ago, US banks enjoyed strong revenue growth in the fourth quarter of 2024 helped by elevated levels of trading in stocks and bonds as well as higher investment banking fees as companies took advantage of low borrowing costs and buoyant stock markets to raise fresh capital.
Given the sharp rise in the KBW Nasdaq Bank index over the last year, and gains of around 50% for banking behemoths like JPMorgan Chase (JPM:NYSE), that was just as well.
Equally significantly, most of the major players raised their revenue growth guidance for this year, thanks to a combination of higher-for-longer interest rates, a strong US economy and hopes of deregulation under President Trump, so analysts are predicting another year of double-digit share-price gains.
2024 ENDED ON A HIGH
JPMorgan Chase, typically the first bank to report earnings each quarter, posted record profit and revenue for the final three months of 2024, underlining its status as the biggest and most successful bank in US history.
Total income climbed 10% to $43.74 billion, well ahead of the consensus forecast of $41.73 billion, thanks to better-than-expected net interest income, while EPS (earnings per share) rose 50% to $4.81 against a forecast of $4.11, helped by higher fixed-income trading and investment banking revenues.
In the press release, chairman and chief executive Jamie Dimon flagged the fact that each line of business posted solid results, with nearly two million new checking accounts opened last year and a staggering net inflow of $486 billion of client assets taking two-year net inflows to a mind-boggling $976 billion.
Adding to the sense of exceptionalism, Dimon pointed to the bank’s ‘fortress balance sheet, evidenced by $547 billion of total loss-absorbing capacity and $1.4 trillion of cash and marketable securities’.
It was a similar story at Citigroup (C:NYSE) and Wells Fargo (WFC:NYSE), with both banks comfortably beating fourth-quarter estimates for revenue and earnings.
Citigroup chief executive Jane Fraser pointed to record results at the bank’s services, wealth and personal banking divisions, as well as the $7 billion-odd of capital returned to shareholders last year and the promise of a further $20 billion share buyback this year.
Wells Fargo chief executive Charlie Scharf said the bank had gained market share ‘in many of the businesses we believe will drive higher growth and returns over time’, highlighting credit cards, where the bank saw strong growth with a strong credit profile, and checking accounts which grew ‘more meaningfully’ in 2024.
Wells returned $20 billion of capital last year via buybacks as well as upping the dividend by 15%, boosting total returns.
2025 PROMISES MORE OF THE SAME
On a call with journalists, JPMorgan Chase’s chief finance officer Jeremy Barnum said group net interest income this year would be around $94 billion, up from a previous forecast of around $91 billion and last year’s tally of $92.6 billion.
This comes as expectations for US interest rate cuts have been rolled back from three or four this year to just one, or in some quarters none at all, meaning higher-for-longer borrowing costs and better margins for the banks.
The US economy has proved remarkably resilient, with unemployment remaining low and consumer spending staying healthy, while household balance sheets are in good shape meaning ‘delinquencies’ or bad loans are expected to stay low this cycle, which is more good news for banks.
Also, as Jamie Dimon observed, businesses are more optimistic about the economy, meaning they are more willing to borrow money to invest, ‘and they are encouraged by expectations for a more pro-growth agenda and improved collaboration between government and business.’
LOOSER REGULATION
This ‘pro-growth agenda’ includes a tacit commitment by Donald Trump to loosen regulations on big business.
Although Dimon sought to play down talk of banks benefiting from an easing of the rules, a good part of the sector’s rally post-election was based on the premise a Trump administration would be more accommodating, not to say lenient, in its dealings with Wall Street.
‘Regarding regulation, we have consistently said it should be designed to effectively balance promoting economic growth and maintaining a safe and sound banking system. It is possible to achieve both goals. This is not about weakening regulation but rather about setting rules that are transparent, fair, holistic in their approach and based on rigorous data analysis, so that banks can play their critical role in the economy and markets.’
However, analysts expect one of Trump’s first moves to be a watering-down of the Basel 3 capital regime, thereby allowing banks to reduce the amount of capital they have to hold as a proportion of their risk-weighted assets.
In the case of JPMorgan Chase, the bank’s year-end Basel 3 CET1 (common equity tier 1) capital was $276 billion or 15.7%, and the market is betting some of this will be returned to investors if the rules are relaxed.
Unlike Citigroup and Wells Fargo, JPMorgan Chase has been sparing in buying back shares after Dimon said in May 2024 the stock was expensive, but since then they’ve only continued to climb.