Standby for some terrible March quarter results from some of the world’s major banks – results which will underline just how well run Australia’s banks are, and how well the local economy is going, led by our surging property and housing markets.
The big Wall Street banks start producing their first quarter earnings figures in the second week of April. They won’t be pretty. They should still earn profits, but they will be weaker than normal.
In a series of updates over the past week, global majors, JPMorgan Chase (the biggest bank in the US) and Citigroup – have warned that they are facing sharp falls in first quarter revenues, and therefore earnings.
Seeing these banks are competing in the same markets as Bank of America, Goldman Sachs, Deutsche Bank, the big French banks, Barclays, Morgan Stanley and several others – the outlook is for industry wide bad news.
Well Fargo, the huge US bank involved in home lending, could have a better quarter than its peers, but it will be tough, judging by layoffs it has already announced.
Citigroup, America’s the third-largest bank by assets, warned investors of a weak first quarter, because of lower revenues at its consumer banking, trading and investment banking businesses.
Citi’s Chief financial officer John Gerspach told a conference this week that markets revenue would be down in the “high mid-teens” as a percentage compared to first quarter of 2013.
That forecast was after comments from JPMorgan Chase last week that trading revenues were down 15% so far this year compared to 2013.
Citi’s trading revenue drop from a year ago reflects “today’s uncertain macro environment” as well as a tough comparison to a strong performance last year, Mr Gerspach said. Despite that, he said the markets business had rebounded from the fourth quarter.
Wall Street banks facing tough first quarter
JPMorgan has already reacted to the weak revenues by announcing thousands of job cuts on Tuesday. The bank said it expected total headcount to fall by 5,000 to 260,000 in 2014. Around 6,000 full-time and contractor jobs in JPMorgan’s home loans unit and 2,000 jobs in its branch and credit-card network will be cut. But it said it will also add jobs – around 3,000 positions in non-banking areas like compliance.
The new job cuts in mortgage banking raise the total number of mortgage cuts the company originally called for by the end of this year to 17,000.
JPMorgan joined the likes of Well Fargo and Bank of America in laying off mortgage workers as higher interest rates in the second half of 2013 made refinancing less attractive to homeowners.
In fact JPMorgan is expecting the pretax profit of its mortgage production business would be negative this year because of the drop off in interest from new and existing mortgage holders.
The warnings from Citi and JPMorgan are important because the first quarter of the year is generally the strongest for banks’ sales and trading units.
Citi also said that it consumer revenues would be “slightly” lower than the fourth quarter as a result of lower credit card activity during the record cold winter, but predicted growth later in the year. The bank added that investment banking revenues were lower in the first quarter so far compared to the previous year as a result of merger and acquisition revenues, mostly reflecting M&A revenues being booked earlier than expected.
And unknown for Citi is the outbreak of tensions between Russia and Ukraine, Citi has a big presence in both countries – around $US900 million of assets in Ukraine and more than $US10 billion in Russia through ZAO Citibank, a fully owned subsidiary with more than 3,000 institutional clients, over 1m retail customers and 50 branches across 12 Russian cities.
Citi has the biggest presence in Russia of US banks. Banks in Austria and France are also heavily exposed to both countries. The sharp falls in the value of the Ukranian and Russian currencies will add to the downturn in revenues and might see losses booked as impairments.
