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US Banks See Upheaval From Fed Shift, Russia Challenging Economy

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by John Biers

Large US banks released a mixed deluge of earnings Thursday, pointing to the continued strength of US households and businesses while warning of rising risks from inflation, geopolitical upheaval and fast-changing monetary policy. News Online

Citigroup, Goldman Sachs and Wells Fargo all reported lower profits compared with the year-ago period, when results were boosted by the release of reserves set aside at the outset of the Covid-19 pandemic in case of bad loans.

Executives painted a complex picture of puts and takes as uncertainty from the war in Ukraine complicates an already unpredictable economy that’s still grappling with Covid-19 disruptions.

Goldman Sachs Chief Executive David Solomon described a series of “cross currents” coursing through the economy.

“While US unemployment levels are low and wages are increasing, inflation is the highest it’s been in decades,” Solomon said on a conference call with analysts.

“We’re seeing new stress on supply chain and commodity prices and US households are facing rising gas prices as well as higher prices for food and housing. We’ve also seen an increased risk of stagflation and mixed signals on consumer confidence,” he said.

The Federal Reserve’s shift to a monetary tightening posture adds to the churn, simultaneously helping and hurting banks.

Wells Fargo, for example, reported higher net interest income reflecting the benefit of being able to charge more for loans.

But the domestic-focused bank, a big player in the US housing market, also experienced its highest quarterly decline since 2003 in the mortgage market as fewer consumers refinance due to higher interest rates.

  • Russia exposure –

Citi reported a 46 percent decline in first-quarter profits to $4.3 billion, while revenues dipped two percent to $19.2 billion.

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Citi earnings were dragged lower by increased expenses, while its banking operations had a mixed performance.

Chief Executive Jane Fraser cited a difficult geopolitical and macro environment as a factor in weaker investment banking results, while pointing to trade loans and cross-border transactions as areas of strength.

The New York bank, which is more exposed than competitors to Russia, said it set aside a $1.9 billion in reserves related to the invasion.

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Atlanta, USA – April 20, 2018: Federal Reserve Bank of Atlanta, Georgia entrance, facade of regulatory, regulation government building in downtown, midtown

About $1 billion in the Citi reserves are for direct exposure to Russia, while the $900 million relate to broader economic risks following the invasion, Citi Chief Financial Officer Mark Mason said on a conference call with reporters.

Since the end of 2021, Citi has reduced its overall exposure to Russia from $9.8 billion to $7.8 billion, Mason said.

“There’s somewhat of a wait and see how some of this plays out,” Mason said of the overall environment.

“Clients are worried about inflation,” Mason said. “They’re looking at the impacts from rising rates,” he added, noting that supply chain woes exacerbated by the Russian invasion.

At Goldman Sachs, profits came in $3.8 billion, down 43 percent from the year-ago period on a 27 percent drop in revenues to $12.9 billion.

Goldman sustained a big drop in revenues from asset management and equity and debt underwriting, offset by a strong activity in some trading divisions amid market volatility.

The results also included a $300 million hit from Russia. Solomon described Goldman’s exposure to the conflict as “relatively limited,” saying the bank has been focused on reducing exposure.

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Wells Fargo, meanwhile, reported profits of $3.7 billion, down 20.8 percent from the 2021 period. Revenues fell 5.1 percent to $17.6 billion.

  • Downside risks –

Thursday’s deluge of earnings reports comes a day after JPMorgan Chase also reported lower profits. Chief Executive Jamie Dimon described a “very strong underlying economy,” but warned that rising interest rates, inflation and the war in Ukraine had lifted the risk of recession.

Wells Fargo Chief Executive Charlie Scharf employed a similar tone, noting that “our internal indicators continue to point towards the strength of our customers’ financial position,” while warning that Fed efforts to counter inflation will “certainly reduce economic growth,” with Ukraine bringing “additional risk to the downside.”

But unlike JPMorgan, which added $902 million in reserves in part because of higher recession risk, Wells Fargo released reserves of $1.1 billion on expectations of fewer bad loans due to upheaval from Covid-19.

Shares of Citi rose one percent to $50.67 in afternoon trading, while Goldman Sachs dipped 0.5 percent to $320.40. Wells Fargo slumped 5.2 percent to $46.00.


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Notes from APS Radio News

During the past few years, a number of the world’s central banks have engaged in massive programs of monetary expansion, even as jobs and businesses were lost by way of virus-related restrictions and quarantines.

For example, beginning in March of 2020, the US Federal Reserve engaged in a substantially greater program of monetary expansion by purchasing hundreds of billions of dollars of Treasury and corporate bonds.

Since the early part of March 2020 to date, the Federal Reserve has added over $4 trillion to its holdings.

In particular, whereas on or about February 24, 2020, the holdings of the Federal Reserve stood at $4.2 trillion, on or about January 17, 2022, the holdings of the Federal Reserve stood at about $8.9 trillion.

As well, the Federal Reserve has kept interest rates low.

Recently, Jerome Powell, the head of the Federal Reserve, said that he wasn’t concerned about inflation and that, for the none, the Federal Reserve would keep interest rates at low levels.

Another examples is that of the Bank of Japan.

According to Fred Economic Data, as of October 2021, the Bank of Japan’s holdings were about $6.4 trillion or about 725 trillion Yen.

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In the early part of March 2020, the Bank of Japan’s holdings were $5.3 holdings. During the period mentioned, the Bank of Japan added over one trillion dollars to its holdings.

A number of corporations have been borrowing money inexpensively and have been purchasing their own shares of stocks, increasing share prices of stocks.

Still, there are concerns among investors.

A number of them have expressed concerns about central banks’ eventually increasing interest rates, as, during the past year, inflation levels have been increasing.

The combination of low interest rates, expansive monetary policies, fiscal stimulus programs, which themselves have infused trillions into the US economy, and shortages of goods and services caused by virus-related restrictions and lockdowns has increased levels of inflation.

Investors also worry, for example, about announcements recently made by Toyota and VW; those companies have announced that because of shortages of particular types of material, they will be reducing levels of production.

Some weeks ago, the results of a survey of UK manufacturers were released.

That survey indicated that many businesses in the UK are concerned about shortages of supplies and will be making necessary adjustments.

In general, jobs and businesses have been lost by way of mandates, restrictions and quarantines, which, in their turn, were imposed by way of the virus narrative.

In the US, overall, the mortality rate of the virus is about .069%, according to Statista, an award-winning service.

The recovery rate is over 99% for most age groups.

What has followed in the wake of lockdowns and mandates has been the infusion of trillions of dollars into the US economy, the increasing succeess of online businesses like Amazon and other large online retailers, various bank and tech-related stocks, the shuttering of small to medium-sized businesses and the loss of millions of jobs.

Another result has been the increasing levels of inflation, especially those of food and fuel.

In official terms, for purposes of reporting, the US Labor Department uses what is called “core inflation”.

Core inflation excludes items like food and fuel, as those are deemed too volatile.

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