DoubleLine Capital CEO Jeffrey Gundlach said he sees one additional rate hike from the Federal Reserve before the central bank ends its tightening cycle.
“I think one more,” Gundlach said Wednesday on CNBC’s “Closing Bell: Overtime.” “I think it’s tough to make the statement ‘ongoing increases’ with an ‘s’ at the end of the word ‘increase’ and do zero unless you had very substantial change in economic conditions.”
The Fed on Wednesday raised its benchmark interest rate by a quarter percentage point, taking its target range to 4.5%-4.75%, the highest since October 2007. The Fed’s statement included language noting that the central bank still sees the need for “ongoing increases in the target range.”
The so-called bond king said Fed Chairman Jerome Powell had a “clarifying” statement at the press conference Wednesday, saying the real yields are positive across the curve. Gundlach said he was referring to the Treasury Inflation-Protected Securities (TIPS), whose yields have stopped their ascent.
“He’s looking at the TIPS market, which had a huge increase in yields last year. That was a major headwind for risk assets in the stock market,” Gundlach said. “They’ve stopped going up and I have a feeling that real yields are going to not go up in the first part of this year. So that keeps a little bit of runway, I think.”
Stocks staged a big comeback in January, led by beaten-down technology names. The S&P 500 rallied 6.2% in January, notching its best start of the year since 2019. The tech-heavy Nasdaq Composite jumped 10.7% last month for its best monthly performance since July.
In Powell’s press conference, the Fed chief said the central bank could conduct a few more rate hikes to bring inflation down to its target.
“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell said. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”
Asked if Gundlach sees the Fed cutting rates this year, he said it’s a coin flip, depending on the incoming inflation data.
“I kind of think that they’ll cut rates in the second half of the year, but I’m not really committed to that idea firmly at all,” Gundlach said.
The widely followed investor also said he believes the odds for a recession this year have decreased, but they are still above 50%.
The top picks of Morgan Stanley bank analyst Betsy Graseck are looking undervalued as the market rallies, she said Wednesday in a report. The shares of Graseck’s three overweight-rated banks, JPMorgan Chase , Wells Fargo and Regions Financial , have underperformed versus the S & P 500 since last month, when the companies released fourth-quarter results , she said. “Our most preferred stocks RF, WFC & JPM have largely been left out of the current market rally and look undervalued for their asset sensitivity and skew to quality,” Graseck said. Graseck is among the analysts who have generally urged caution on banks, citing the expectation that loan losses will rise this year as the economy slows or even enters a recession. But bank stocks have caught a bid in early 2023, along with 2022’s other beaten-down sectors, with the KBW Bank Index up 11.5% year to date. .BKX YTD mountain 24-company KBW Bank Index Investors’ attention will likely shift from 2023 guidance to how the companies perform on net interest income and provisions for loan losses, she said. Her three top picks could rise a median 24%, about 4% more than other large-cap banks in her coverage in a base-case scenario, she said. — CNBC’s Michael Bloom contributed to this report.
David Solomon, Chairman & CEO of Goldman Sachs, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 23rd, 2023.
Adam Galica | CNBC
Goldman Sachs CEO David Solomon will get a $25 million compensation package for his work last year, the bank said Friday in a regulatory filing.
The package includes a $2 million base salary and variable compensation of $23 million, New York-based Goldman said in the filing. Most of Solomon’s bonus — 70%, or $16.1 million — is in the form of restricted shares tied to performance metrics, while the rest is paid in cash, the bank said.
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Solomon’s pay, while large, is about 29% lower than the $35 million he was granted for his 2021 performance. Similarly, Goldman’s full-year earnings fell by 48% to $11.3 billion amid sharp declines in investment banking and asset management revenue, the company said last week.
While the bank was primarily hit by industrywide slowdowns in capital markets activity as the Federal Reserve raised interest rates, Solomon also faced his own set of issues. Goldman was forced to scale back its ambitions in consumer finance and lay off nearly 4,000 workers in two rounds of terminations in recent months.
JPMorgan Chase CEO Jamie Dimon believes interest rates could go higher than what the Federal Reserve currently projects as inflation remains stubbornly elevated.
“I actually think rates are probably going to go higher than 5% … because I think there’s a lot of underlying inflation, which won’t go away so quick,” Dimon said Thursday on CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland.
To battle soaring prices, the Fed has raised its benchmark interest rate to a targeted range between 4.25% and 4.5%, the highest level in 15 years. The anticipated “terminal rate,” or point where officials expect to end the rate hikes, was set at 5.1% at its December meeting.
The consumer price index, which measures the cost of a broad basket of goods and services, rose 6.5% in December from a year ago, marking the smallest annual increase since October 2021.
Dimon said the recent easing of inflation comes from temporary factors such as a pullback in oil prices and a slowdown in China due to the Covid pandemic.
Jamie Dimon, President, CEO & Chairman of JP Morgan Chase, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 19th, 2023.
Adam Galica | CNBC
“We’ve had the benefit of China’s slowing down, the benefit of oil prices dropping a little bit,” Dimon said. “I think oil gas prices probably go up the next 10 years … China isn’t going to be deflationary anymore.”
The series of aggressive rate hikes have fueled worries of a recession in the U.S. Central bankers still feel they have leeway to raise rates as the labor market and the consumer remain strong.
The JPMorgan chief said if the U.S. suffers a mild recession, interest rates will rise to 6%. He added that it’s hard for anyone to predict economic downturns.
“I know there are going to be recessions, ups and downs. I really don’t spend that much time worrying about it. I do worry that poor public policy damages American growth,” Dimon said.
It’s time to move away interest rate sensitive brokers such as Charles Schwab , according to Bank of America. Analyst Craig Siegenthaler double downgraded shares to underperform from buy, and lowered his price target, saying client cash sorting will continue to remain elevated in the first half of this year. Client cash sorting refers to clients moving cash out of lower-yielding bank deposits into higher-yielding alternatives such as money market funds. “This change is driven by our view that (1) client cash sorting will continue at an elevated pace in 1H23 (pressuring liquidity, interest earning assets & bank deposit account [BDA] levels) and (2) the Fed will end its interest rate hiking cycle by this summer, removing a powerful nearterm profit driver (while securities portfolio reinvestment opportunity remains),” Siegenthaler wrote Thursday. Charles Schwab outperformed last year, gaining 0.1%, and is “arguably the biggest beneficiary of higher interest rates across diversified financials,” the analyst said. Regardless, the analyst expects Charles Schwab’s revenue and profit growth will decelerate this year due to a constricting balance sheet. The analyst noted that client cash sorting jumped in the fourth quarter of 2022, is expected to remain elevated in the first half of 2023, before decelerating and concluding by the end of this year. The analyst’s $75 price objective, cut from $92 previously, implies shares can drop another roughly 7% from Wednesday’s closing price. Shares declined 2% in the premarket Thursday. —CNBC’s Michael Bloom contributed to this report.
DAVOS, Switzerland – The finance and tech CEOs gathering at the World Economic Forum this week expressed measured optimism about the economy in 2023 — but at least one major risk looms for markets, they said.
The resilient U.S. economy, a mild European winter and China’s reopening have given investors and forecasters hope that a severe recession can be avoided, Citigroup CEO Jane Fraser told CNBC’s Sara Eisen on Tuesday.
“All in all, the year has started off better than everyone expected,” Fraser said. “Everyone’s converging now in the states more around a mild, manageable recessionary scenario, driven by the strength that we’ve got in the labor markets.”
The U.S. economy has slowed since the Federal Reserve began raising interest rates last year, sowing fears that a recession was unavoidable.
In the early weeks of 2023, investors have begun to hope that moderating inflation and strong employment figures could result in a so-called soft landing. But budding optimism at the annual meeting of billionaires, heads of state and business leaders in the Swiss Alps collided with a fresh threat, on top of existing concerns including the Ukraine war and global climate change.
The world’s largest economy risks defaulting on its debt for the first time in modern history this summer as politicians wrangle over raising the country’s debt limit, currently capped at $31.4 trillion. The U.S. is expected to reach its debt limit Thursday, Treasury Secretary Janet Yellen said last week. After that, the Treasury will find ways to fund their debt obligations until at least early June, Yellen said.
That sets up a standoff in Congress in the weeks ahead. Republicans and Democrats will engage in brinkmanship over political goals. The last time a potential default risk surfaced was in 2011, when lawmakers averted disaster after markets convulsed and the U.S. had its credit rating downgraded.
“I don’t think anybody knows what would happen if they really went further than what happened in 2011,” the CEO of a Wall Street bank said on the sidelines of the conference. “That’s why it’s scary.”
The CEO, who declined to be identified speaking candidly, said he had just met a group of U.S. lawmakers worried about the coming impasse.
“It would affect markets and it would be a drag on economic activity because of the uncertainty,” he said. “It would be really bad for us.”
But coming to a deal to increase the U.S. debt limit won’t be easy in a political environment that’s grown even more polarized in the past decade.
Addressing the debt ceiling “is going to be hard,” said Salesforce CEO Marc Benioff on Wednesday. House Speaker Kevin McCarthy, R-Calif., has “got to handle it, but he’s got a lot of issues,” he said.
The newly elected McCarthy is in a bind. While conservative members of his caucus insist they do not want the country to default on its debt, McCarthy is under pressure to demand deep spending cuts. McCarthy has suggested that he won’t support raising the debt ceiling without a compromise on spending.
The situation is a “mess” with at least one possible solution: Congress could pass a “clean debt limit,” according to Peter Orszag, CEO of financial advisory at Lazard. That refers to a borrowing increase without spending cuts.
McCarthy, however, would likely not survive as speaker if he agreed to that, Orszag said.
Another top Wall Street CEO said he planned to push lawmakers at Davos to focus more on spending cuts rather than the debt ceiling.
The worries contrast with early signs this month that formerly frozen markets have begun to awaken. For instance, debt issuance has been “incredibly strong” in January so far, according to Fraser.
It’s too early to say whether those signs are a harbinger of better times for investment banks and the wider economy, she said.
David Solomon, chief executive officer of Goldman Sachs Group Inc., during a Bloomberg Television at the Goldman Sachs Financial Services Conference in New York, US, on Tuesday, Dec. 6, 2022.
Michael Nagle | Bloomberg | Getty Images
Goldman Sachs is scheduled to report fourth-quarter earnings before the opening bell Tuesday.
Here’s what Wall Street expects:
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Earnings: $5.48 per share, 49% lower than a year earlier, according to Refinitiv
Revenue: $10.83 billion, 14% lower than a year earlier.
Trading Revenue: Fixed Income $2.31 billion, Equities $2.14 billion
Investing Banking: $1.75 billion
How long will the investment banking drought last?
That’s one of the top questions analysts will have for Goldman CEO David Solomon.
While the fourth quarter was an ugly one for bankers — Wall Street rivals JPMorgan Chase and Citigroup each posted declines in investment banking revenue of nearly 60% last week — analysts question the odds of a rebound sometime later this year.
They’ll also want to hear Solomon’s views on headcount and expenses after the bank laid off up to 3,200 employees last week, as well as details about Goldman’s consumer operations as it scales back ambitions there.
Goldman shares have climbed 8.9% this year going into Tuesday’s trading, compared with a 6.7% advance for the KBW Bank Index.
Last week, JPMorgan Chase and Bank of America topped profit expectations on surging net interest income, while Wells Fargo and Citigroup posted mixed results. Morgan Stanley is also scheduled to release results Tuesday.
This story is developing. Please check back for updates.
Jamie Dimon, CEO of JPMorgan Chase, testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled Annual Oversight of the Nations Largest Banks, in Hart Building on Thursday, September 22, 2022.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
JPMorgan Chase is scheduled to report fourth-quarter earnings before the opening bell Friday.
Here’s what Wall Street expects:
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Earnings: $3.07 per share, 7.9% lower than a year earlier, according to Refinitiv.
Revenue: $34.3 billion, 13% higher than a year earlier.
Provision for credit losses $1.96 billion, according to StreetAccount
Trading revenue: fixed income $3.76 billion, equities $1.92 billion
Investment banking revenue: $1.57 billion
JPMorgan, the biggest U.S. bank by assets, will be closely watched for clues on how the industry is navigating an economy at a crossroads.
Analysts are expecting a mixed bag of conflicting trends from banks. Higher rates will help lenders earn more interest income, but some of that boost will be offset by larger provisions for expected loan losses as the economy slows.
Wall Street won’t likely come to the rescue. Investment banking revenue is expected to plunge 50% in the wake of frozen IPO markets and subdued deals, Barclays analyst Jason Goldberg said in a Jan. 11 note.
That will be partly offset by a 10% rise in trading revenue, thanks to a boost from fixed income operations, he wrote.
Of greater interest, perhaps, is what JPMorgan CEO Jamie Dimon says about the economy. The veteran CEO rattled markets last year when he said an economic “hurricane” caused by the Federal Reserve was headed for the U.S.
Shares of JPMorgan have climbed 4% this year, compared with the 6% rise of the KBW Bank Index.
It’s been a confusing time for investors in bank stocks. The industry got what it wanted last year — higher interest rates, courtesy of the Federal Reserve — but bank stocks still got hammered because of recession fears. This year, bank shares have climbed on hopes for an economic soft landing that would help them avoid a wave of profit-crushing loan defaults. The 24-company KBW Bank Index has climbed 5.3% so far, compared to a 24% decline in 2022. Analysts are expecting a mixed bag of conflicting trends when four of the largest U.S. banks report fourth-quarter results Friday. Higher rates will help companies earn more interest income, but some of that boost will be offset by larger provisions for expected loan losses as the economy slows. As a result, analysts are torn as to whether now is the time to invest in bank stocks, or whether it’s better to wait until getting an all-clear signal on the industry. For clues on the sector’s direction, here are four key metrics to watch: Net interest income Net interest income (NII), one of the main drivers of bank revenue, should continue to rise in the fourth quarter, JPMorgan analyst Vivek Juneja said in a Jan. 6 note. NII is expected to rise about 5% over the third quarter on average, thanks to higher rates and loan growth, according to the analyst. But the future path of this crucial yardstick is what most concerns investors. How much further the Fed raises rates and how long they are kept elevated, before a potential pivot, are all factors. Investors are concerned that NII growth will stall out later this year if loan growth subsides and funding costs rise thanks to competition for deposits. “Our continued cautious view … reflects ongoing macro risks and likely weakening bank fundamentals —including peaking net interest margins,” Deutsche Bank analyst Matt O’Connor said in Jan. 5 note. Reserves Thanks to recent changes in accounting rules, banks have to set aside reserves for loan losses when they anticipate a turn in the economy. The result is that even before borrowers default, banks begin to register the impact of an impending recession. Morgan Stanley analyst Betsy Graseck thinks that loan loss provisions will be higher than expected for every large bank she covers, according to a Jan. 6 note. That’s in part informed by her tracking of filings from the credit card industry, which show that late payments are rising at the fastest pace since the 2008 financial crisis, she wrote. “With most U.S. economists forecasting either a recession or significant slowdown this year, banks will likely incorporate a more severe economic outlook” in their scenario planning, Graseck wrote. Wall Street Investment banking fees will end a tough year on a low note compared to a year ago, when the market was booming. Revenue is expected to plunge 50% in the wake of frozen IPO markets and subdued deals activity, Barclays analyst Jason Goldberg wrote in a Jan. 11 note. That will be partly offset by a 10% rise in trading revenue, thanks to a boost from fixed income operations, Goldberg wrote. Finally, lower average levels in the stock and bond markets will pressure asset management fees, he added. The outlook Investors tend to discount fourth-quarter results in favor of what managements say about their outlooks for the coming year. For that reason, conference calls with bank executives will be crucial for investors to discern changes in forward guidance on metrics including reserves, net interest income, share buybacks and expectations for investment banking, trading and lending in 2023. “While 4Q earnings should be fine, we remain cautious about commentary regarding the outlook and overall earnings trends,” JPMorgan’s Juneja wrote in his note. “Uncertainty about a recession and whether it is mild or harsh will likely pressure markets medium term.” Of special interest is guidance on expenses, given concern that wage inflation will force banks to contend with rising costs at the same time that revenue could fall. “We expect above-consensus expense guides will likely weigh on bank stocks during 4Q22 earnings as managements communicate their 2023 budget plans,” Graseck said. — CNBC’s Michael Bloom contributed reporting
Dimon said in June that he was preparing the bank for an economic “hurricane” caused by the Federal Reserve and Russia’s war in Ukraine.
Al Drago | Bloomberg | Getty Images
JPMorgan Chase on Thursday shut down the website for a college financial aid platform it bought for $175 million after alleging that the company’s founder created nearly 4 million fake customer accounts.
The country’s biggest bank acquired Frank in Sept. 2021 to help it deepen relationships with college students, a key demographic, a Chase executive told CNBC at the time.
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JPMorgan touted the deal as giving it the “fastest-growing college financial planning platform” used by more than five million students at 6,000 institutions. It also provided access to the startup’s founder Charlie Javice, who joined the New York-based bank as part of the acquisition.
Months after the transaction closed, JPMorgan said it learned the truth after sending out marketing emails to a batch of 400,000 Frank customers. About 70% of the emails bounced back, the bank said in a lawsuit filed last month in federal court.
Javice, who had approached JPMorgan in mid-2021 about a potential sale, lied to the bank about her startup’s scale, the bank alleged. Specifically, after being pressed for confirmation of Frank’s customer base during the due diligence process, Javice used a data scientist to invent millions of fake accounts, according to JPMorgan.
“To cash in, Javice decided to lie, including lying about Frank’s success, Frank’s size, and the depth of Frank’s market penetration in order to induce JPMC to purchase Frank for $175 million,” the bank said. “Javice represented in documents placed in the acquisition data room, in pitch materials, and through verbal presentations [that] more than 4.25 million students had created Frank accounts to begin applying for federal student aid using Frank’s application tool.”
Instead of gaining a business with 4.25 million students, JPMorgan had one with “fewer than 300,000 customers,” JPMorgan said in the suit.
A lawyer for Javice told the Wall Street Journal that JPMorgan had “manufactured” reasons to fire her late last year to avoid paying millions of dollars owed to her. Javice has sued JPMorgan, saying that the bank should front legal bills she incurred during its internal investigations.
“After JPM rushed to acquire Charlie’s rocketship business, JPM realized they couldn’t work around existing student privacy laws, committed misconduct and then tried to retrade the deal,” attorney Alex Spiro told the Journal. “Charlie blew the whistle and then sued.”
Spiro, a partner with Quinn Emanuel, didn’t immediately return a call from CNBC.
JPMorgan spokesman Pablo Rodriguez had this response:
“Our legal claims against Ms. Javice and Mr. Amar are set out in our complaint, along with the key facts,” he said. “Ms. Javice was not and is not a whistleblower. Any dispute will be resolved through the legal process.”
The alleged fraud perpetrated by Javice and one of her executives “materially damaged JPMC in an amount to be proven at trial, but not less than $175 million,” JPMorgan said in its suit.
Regardless of the outcome of this legal scuffle, this is an embarrassing episode for JPMorgan and its CEO Jamie Dimon. In a bid to fend off encroaching competitors, JPMorgan has gone on a buying spree of fintech companies in recent years, and Dimon has repeatedly defended his technology investments as necessary ones that will yield good returns.
The fact that a young founder in an industry known for shaky metrics and a “fake it ’til you make it” ethos managed to dupe JPMorgan calls into question how stringent the bank’s due diligence process is.
In an interview at the time of the deal, Javice marveled at how far she had come in just a few years leading her startup.
“Today is my first day employed by someone else, ever,” Javice told CNBC. “I mean it still feels very much like, pinch me, did this really happen?”
As a result of the legal scuffle, JPMorgan shut down Frank early Thursday morning.
“Frank is no longer available” the website now reads. “To file your Free Application for Federal Student Aid (FAFSA), visit StudentAid.gov.”
Wells Fargo is stepping back from the multi-trillion dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates.
Instead of its previous goal of reaching as many Americans as possible, the company will now offer home loans to existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.
The dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and heightened regulatory oversight — both industrywide, and specific to Wells Fargo after its 2016 fake accounts scandal — led to the decision, said consumer lending chief Kleber Santos.
“We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” Santos said in a phone interview. “As part of that review, we determined that our home lending business was too large, both in terms of overall size and its scope.”
It’s the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019. Mortgages are by far the biggest category of debt held by Americans, making up 71% of the $16.5 trillion in total household balances. Under Scharf’s predecessors, Wells Fargo took pride in its vast share in home loans — it was the country’s top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.
Now, as a result of this and other changes that Scharf is making, including pushing for more revenue from investment banking and credit cards, Wells Fargo will more closely resemble megabank rivals Bank of America and JPMorgan Chase. Both companies ceded mortgage share after the 2008 financial crisis.
Following those once-huge mortgage players in slimming down their operations has implications for the U.S. mortgage market.
As banks stepped back from home loans after the disaster that was the early 2000’s housing bubble, non-bank players including Rocket Mortgage quickly filled the void. But these newer players aren’t as closely regulated as the banks are, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third biggest mortgage lender after Rocket and United Wholesale Mortgage.
As part of its retrenchment, Wells Fargo is also shuttering its correspondent business that buys loans made by third-party lenders and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.
The correspondence channel is a significant pipeline of business for San Francisco-based Wells Fargo, one that became larger as overall loan activity shrank last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondence loans.
The sale of mortgage servicing rights to other industry players will take at least several quarters to complete, depending on market conditions, Santos said. Wells Fargo is the biggest U.S. mortgage servicer, which involves collecting payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, as of the third quarter, according to data from Inside Mortgage Finance.
Altogether, the shift will result in a fresh round of layoffs for the bank’s mortgage operations, executives acknowledged, but they declined to quantify exactly how many. Thousands of mortgage workers were terminated or voluntarily left the company last year as business declined.
The news shouldn’t be a complete surprise to investors or employees. Wells Fargo employees have speculated for months about changes coming after Scharf telegraphed his intentions several times in the past year. Bloomberg reported in August that the bank was considering paring back or halting correspondent lending.
“It’s very different today running a mortgage business inside a bank than it was 15 years ago,” Scharf told analysts in June. “We won’t be as large as we were historically” in the industry, he added.
Wells Fargo said it was investing $100 million towards its goal of minority homeownership and placing more mortgage consultants in branches located in minority communities.
“Our priority is to de-risk the place, to focus on serving our own customers and play the role that society expects us to play as it relates to the racial homeownership gap,” Santos said.
The mortgage shift marks what is potentially the last major business change Scharf will undertake after splitting the bank’s operations into five divisions, bringing in 12 new operating committee members and creating a diversity segment.
In a phone interview, Scharf said that he didn’t anticipate doing other major changes, with the caveat that the bank will need to adapt to changing conditions.
“Given the quality of the five major businesses across the franchise, we think we’re positioned to compete against the very best out there and win, whether it’s banks, non-banks or fintechs,” he said.
People enter the Goldman Sachs headquarters building in New York, U.S., on Monday, June 14, 2021.
Michael Nagle | Bloomberg | Getty Images
Goldman Sachs is laying off fewer employees than feared, but the cut is still a deep one.
The global investment bank is letting go of as many as 3,200 employees starting Wednesday, according to a person with knowledge of the firm’s plans.
That amounts to 6.5% of the 49,100 employees Goldman had in October, which is below the 8% reported last month as the upper end of possible cuts.
The final figure, reported earlier by Bloomberg, is a result of internal discussions between business heads and top management over the last month, said the person, who declined to be identified speaking about personnel decisions.
Goldman CEO David Solomon kicked off Wall Street’s layoff season in September and then opted to enact the industry’s deepest cuts so far. Bank employee levels swelled over the last two years in response to a boom in deals and trading activity, but the good times didn’t last: IPO issuance plunged 94% last year because of suddenly inhospitable markets, according to SIFMA data.
Now, with concerns that the economy will slow further this year, Goldman is pulling back on headcount in case stock and bond issuance and mergers don’t rebound. Solomon is also scaling back his ambitions in consumer banking, resulting in part of the layoffs.
Other investment banks are adopting a “wait and see” attitude in the coming weeks. If revenues are tracking below estimate in February and March, the industry could cut more workers, said a person familiar with a leading Wall Street firm’s processes.
Wells Fargo analyst Mike Mayo named Bank of America his top pick for 2023 on expectations for “near best-in-class” growth in net interest income, profit margins and earnings. The stock should merit a higher multiple this year and can climb 55% from its price on Tuesday, Mayo wrote in a note published that day. The country’s second biggest bank by assets exemplifies Mayo’s bull thesis for banks, which is that they will weather the impending economic downturn better than expected because the industry has spent the past decade reducing risk across businesses. “As much as any bank, it is ‘showtime’ for BAC if, as we expect, the onslaught of higher rates leads to greater NII growth, more business volume demonstrates model scalability, and slower economic growth further proves BAC’s resiliency after years of de-risking,” Mayo wrote. The veteran bank analyst’s call clashes with several of his peers, who published bearish notes last month that cited expectations for a U.S. recession in 2023. Higher reserves for bad loans, rising expenses and funding costs for deposits, and moribund results in wealth management and investment banking were predicted by the pessimistic analysts. To be fair, Bank of America was also Mayo’s top pick at the start of 2022. After a strong start to the year, investors bailed on banks amid worries that an impending recession will lead to higher defaults. Shares of the Charlotte, North Carolina-based bank fell 26% last year, worse than the 15% decline of rival JPMorgan Chase and the 24% drop of the KBW Bank Index . “Our view is that this stemmed from recency bias from the Global Financial Crisis and ignores what amounts to perhaps the greatest amount of de-risking of any large bank, esp. based on the Fed stress test,” Mayo wrote of last year’s stock decline. Mayo’s other top picks are U.S. Bancorp and PNC Financial , both of which should beat consensus earnings by at least 6% over the next two years, Mayo wrote. His favored banks should be able to address investors’ concerns better than competitors by holding onto gains in net interest income, exhibit good expense control and “superior” credit quality, he wrote. — CNBC’s Michael Bloom contributed to this report.
There’s “less compelling” upside for Goldman Sachs in 2023, according to Wolfe Research. Analyst Steven Chubak downgraded shares to peer perform from outperform, saying other bank stocks such as Wells Fargo and Bank of New York Mellon are more attractive after the recent gains at Goldman Sachs. “We have been strong proponents of GS’ strategy over the last few years, and GS has been one of our Top Picks since our meeting with then-CFO Scherr in March 2019. The stock has done very well in that time (+72%), outperforming the S & P (+36%) and BKX (+8%),” Chubak wrote in a Wednesday note. “However, as we head in 2023, we see less compelling upside in shares, prompting us to move to the sidelines,” Chubak wrote. Shares of Goldman Sachs declined 10% in 2022, outperforming the S & P 500, which was down about 19% in the same period. The investment bank also beat Wells Fargo, which lost nearly 12%, and Bank of New York Mellon, which was down 19%. Even so, the mid-point of the firm’s future value range of $388 represents just 13% upside for shares, according to the analyst. Shares of Goldman Sachs rose slightly in Wednesday premarket trading. Other challenges hang over the banking stock, including a series of proposed international banking reforms called Basel 4 from Switzerland. Wolfe Research also expects downside to 2023 and 2024 consensus revenue estimates. —CNBC’s Michael Bloom contributed to this report.
Ether has hugely outperformed bitcoin since both cryptocurrencies formed a bottom in June 2022. Ether’s superior gains have come as investors anticipate a major upgrade to the ethereum blockchain called “the merge.”
Yuriko Nakao | Getty Images
U.S. banking regulators warned financial institutions on Tuesday that dealing with cryptocurrency exposes them to an array of risks, including scams and fraud.
“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the regulators said in a joint statement from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The comments come just weeks after the spectacular collapse of crypto exchange FTX.
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The regulators said the risks include: “fraud and scams among crypto-asset sector participants” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.”
During the crypto boom, when financial players seemed to announce a new crypto partnership on a weekly basis, bank executives said they needed further guidance from regulators before dealing more directly with bitcoin and other cryptocurrencies in retail and institutional trading businesses.
Now, about two months after the bankruptcy filing of FTX, the industry has been exposed as rife with poor risk management, interconnected risks and outright fraud.
While the statement indicated that regulators were still assessing how banks could adopt crypto while adhering to their various mandates for consumer protection and anti-money laundering, they seemed to give a clue as to which direction they were headed.
“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the regulators said.
They also said that they have “significant safety and soundness concerns” with banks that focus on crypto clients or that have “concentrated exposures” to the sector.
The outlook for Ally Financial is more uncertain in 2023, according to Barclays. Analyst Jason Goldberg downgraded shares of Ally to equal weight from overweight, saying the bank is more vulnerable to a downshift in the economy. “This year is likely to witness the end of the Fed tightening cycle and loan loss normalization,” Goldberg wrote in a Tuesday note. “As such, we are becoming less constructive on those with outsized asset sensitivity and areas we believe loan losses will adjust the fastest – namely, lower-end consumer (most impacted by much reduced stimulus, elevated inflation, and higher interest rates) and commercial real estate (uncertainties in office, retail, health care segments),” Goldberg added. Banks are starting the new year with several advantages and disadvantages. While they are generally well positioned to weather economic shocks, they’re also dealing with an uncertain macro that could mean higher credit losses and slowing loan growth. Ally shares had their worst year on record in 2022, dropping 48.7%. The analyst lowered his price target to $33, down from $40, which implies nearly 35% upside from Friday’s closing price. “While ALLY should still be able to achieve a core ROTCE in the mid-double digits range over time, results in the near-term will likely be pressured due to the impacts of higher rates partially offset by continued loan growth,” Goldberg wrote. In addition to Ally, the analyst downgraded shares of Capital One Financial to equal weight from overweight, saying that the two stocks are the “most exposed banks we cover to the lower-end consumer.” —CNBC’s Michael Bloom contributed to this report.
Partygoers with unicorn masks at the Hometown Hangover Cure party in Austin, Texas.
Harriet Taylor | CNBC
Bill Harris, former PayPal CEO and veteran entrepreneur, strode onto a Las Vegas stage in late October to declare that his latest startup would help solve Americans’ broken relationship with their finances.
“People struggle with money,” Harris told CNBC at the time. “We’re trying to bring money into the digital age, to redesign the experience so people can have better control over their money.”
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But less than a month after the launch of Nirvana Money, which combined a digital bank account with a credit card, Harris abruptly shuttered the Miami-based company and laid off dozens of workers. Surging interest rates and a “recessionary environment” were to blame, he said.
The reversal is a sign of more carnage to come for the fintech world.
Many fintech companies — particularly those dealing directly with retail borrowers — will be forced to shut down or sell themselves next year as startups run out of funding, according to investors, founders and investment bankers. Others will accept funding at steep valuation haircuts or onerous terms, which extends the runway but comes with its own risks, they said.
Top-tier startups that have three to four years of funding can ride out the storm, according to Point72 Ventures partner Pete Casella. Other private companies with a reasonable path to profitability will typically get funding from existing investors. The rest will begin to run out of money in 2023, he said.
“What ultimately happens is you get into a death spiral,” Casella said. “You can’t get funded and all your best employees start jumping ship because their equity is underwater.”
Thousands of startups were created after the 2008 financial crisis as investors plowed billions of dollars into private companies, encouraging founders to attempt to disrupt an entrenched and unpopular industry. In a low interest rate environment, investors sought yield beyond public companies, and traditional venture capitalists began competing with new arrivals from hedge funds, sovereign wealth and family offices.
The movement shifted into overdrive during the Covid pandemic as years of digital adoption happened in months and central banks flooded the world with money, making companies like Robinhood, Chime and Stripe familiar names with huge valuations. The frenzy peaked in 2021, when fintech companies raised more than $130 billion and minted more than 100 new unicorns, or companies with at least $1 billion in valuation.
“20% of all VC dollars went into fintech in 2021,” said Stuart Sopp, founder and CEO of digital bank Current. “You just can’t put that much capital behind something in such a short time without crazy stuff happening.”
The flood of money led to copycat companies getting funded anytime a successful niche was identified, from app-based checking accounts known as neobanks to buy now, pay later entrants. Companies relied on shaky metrics like user growth to raise money at eye-watering valuations, and investors who hesitated on a startup’s round risked missing out as companies doubled and tripled in value within months.
The thinking: Reel users in with a marketing blitz and then figure out how to make money from them later.
“We overfunded fintech, no question,” said one founder-turned-VC who declined to be identified speaking candidly. “We don’t need 150 different neobanks, we don’t need 10 different banking-as-a-service providers. And I’ve invested in both” categories, he said.
The first cracks began to appear in September 2021, when the shares of PayPal, Block and other public fintechs began a long decline. At their peak, the two companies were worth more than the vast majority of financial incumbents. PayPal’s market capitalization was second only to that of JPMorgan Chase. The specter of higher interest rates and the end of a decade-plus-long era of cheap money was enough to deflate their stocks.
Many private companies created in recent years, especially those lending money to consumers and small businesses, had one central assumption: low interest rates forever, according to TSVC partner Spencer Greene. That assumption met the Federal Reserve’s most aggressive rate-hiking cycle in decades this year.
“Most fintechs have been losing money for their entire existence, but with the promise of ‘We’re going to pull it off and become profitable,’” Greene said. “That’s the standard startup model; it was true for Tesla and Amazon. But many of them will never be profitable because they were based on faulty assumptions.”
Even companies that previously raised large amounts of money are struggling now if they are deemed unlikely to become profitable, said Greene.
“We saw a company that raised $20 million that couldn’t even get a $300,000 bridge loan because their investors told them `We are no longer investing a dime.’” Greene said. “It was unbelievable.”
All along the private company life cycle, from embryonic startups to pre-IPO companies, the market has reset lower by at least 30% to 50%, according to investors. That follows the decline in public company shares and a few notable private examples, like the 85% discount that Swedish fintech lender Klarna took in a July fundraising.
Now, as the investment community exhibits a newfound discipline and “tourist” investors are flushed out, the emphasis is on companies that can demonstrate a clear path toward profitability. That is in addition to the previous requirements of high growth in a large addressable market and software-like gross margins, according to veteran fintech investment banker Tommaso Zanobini of Moelis.
“The real test is, does the company have a trajectory where their cash flow needs are shrinking that gets you there in six or nine months?” Zanobini said. “It’s not, trust me, we’ll be there in a year.”
As a result, startups are laying off workers and pulling back on marketing to extend their runway. Many founders are holding out hope that the funding environment improves next year, although that is looking increasingly unlikely.
As the economy slows further into an expected recession, companies that lend to consumers and small businesses will suffer significantly higher losses for the first time. Even profitable legacy players like Goldman Sachs couldn’t stomach the losses required to create a scaled digital player, pulling back on its fintech ambitions.
“If loss ratios are increasing in a rate increasing environment on the industry side, it’s really dangerous because your economics on loans can get really out of whack,” said Justin Overdorff of Lightspeed Venture Partners.
Now, investors and founders are playing a game of trying to determine who will survive the coming downturn. Direct-to-consumer fintechs are generally in the weakest position, several venture investors said.
“There’s a high correlation between companies that had bad unit economics and consumer businesses that got very large and very famous,” said Point72’s Casella.
Many of the country’s neobanks “are just not going to survive,” said Pegah Ebrahimi, managing partner of FPV Ventures and a former Morgan Stanley executive. “Everyone thought of them as new banks that would have tech multiples, but they are still banks at the end of the day.”
Beyond neobanks, most companies that raised money in 2020 and 2021 at nosebleed valuations of 20 to 50 times revenue are in a predicament, according to Oded Zehavi, CEO of Mesh Payments. Even if a company like that doubles revenue from its last round, it will likely have to raise fresh funds at a deep discount, which can be “devastating” for a startup, he said.
“The boom led to some really surreal investments with valuations that cannot be justified, maybe ever,” Zehavi said. “All of these companies across the world are going to struggle, and they will need to be acquired or shut down in 2023.”
As in previous down cycles, however, there is opportunity. Stronger players will snap up weaker ones through acquisition and emerge from the downturn in a stronger position, where they will enjoy less competition and lower costs for talent and expenses, including marketing.
“The competitive landscape shifts the most during periods of fear, uncertainty and doubt,” said Kelly Rodriques, CEO of Forge, a trading venue for private company stock. “This is when the bold and the well capitalized will gain.”
While sellers of private shares have generally been willing to accept bigger valuation discounts as the year went on, the bid-ask spread is still too wide, with many buyers holding out for lower prices, Rodriques said. The logjam could break next year as sellers become more realistic about pricing, he said.
Bill Harris, co-founder and CEO of Personal Capital
Source: Personal Capital.
Eventually, incumbents and well-financed startups will benefit, either by purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers return to banks and asset managers.
Though he didn’t let on during an October interview that Nirvana Money would soon be among those to shutter, Harris agreed that the cycle was turning on fintech companies.
But Harris — founder of nine fintech companies and PayPal’s first CEO — insisted that the best startups would survive and ultimately thrive. The opportunities to disrupt traditional players are too large to ignore, he said.
“Through good times and bad, great products win,” Harris said. “The best of the existing solutions will come out stronger and new products that are fundamentally better will win as well.”
Charles Scharf, chief executive officer of Wells Fargo & Co., listens during a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 10, 2020.
Andrew Harrer | Bloomberg | Getty Images
Wells Fargo agreed to a $3.7 billion settlement with the Consumer Financial Protection Bureau over customer abuses tied to bank accounts, mortgages and auto loans, the regulator said Tuesday.
The bank was ordered to pay a $1.7 billion civil penalty and “more than $2 billion in redress to consumers,” the CFPB said in a statement. In a separate statement, the San Francisco-based company said that many of the “required actions” tied to the settlement were already done.
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“The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes,” the agency said in its release. “Consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank.”
The resolution lifts one overhang for the bank, which has been led by CEO Charlie Scharf since October 2019. In October, the bank set aside $2 billion for legal, regulatory and customer remediation matters, igniting speculation that a settlement was nearing.
But other regulatory hurdles remain: Wells Fargo is still operating under consent orders tied to its 2016 fake accounts scandal, including one from the Fed that caps its asset growth.
Furthermore, the bank said that fourth-quarter expenses would include a $3.5 billion operating loss, or $2.8 billion after taxes, from the incremental costs of the CFPB civil penalty and customer remediation efforts, as well as other legal matters. The bank is still expected to post an overall profit when it reports results in mid January, according to a person with knowledge of the matter.
Shares of the bank rose 1.2% in early trading.
“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Scharf said in his statement. “We and our regulators have identified a series of unacceptable practices that we have been working systematically to change and provide customer remediation where warranted.”
CFPB Director Rohit Chopra said Wells Fargo’s “rinse-repeat cycle of violating the law” hurt millions of American families and that the settlement was an “important initial step for accountability” for the bank.
This story is developing. Please check back for updates.
It’s time to move to the sidelines on Home Depot , according to Credit Suisse. Analyst Karen Short assumed coverage of Home Depot with a neutral rating, with a previous rating of outperform, saying the slowing housing market spells trouble for the home improvement retailer. “Our general view is that HD story offers a healthy balance of reasons to be positive longer term but cautious in the near term,” Short wrote in a Monday note. The analyst cited several reasons for her cautious outlook, including declines in both the stock market and home prices that could create a “negative wealth effect” that delays or cancels home improvement projects for consumers. The S & P 500 is down about 19% this year. Meanwhile, home prices remain elevated, but are down 8% from their June 2022 peak, according to the note. “A forecast from the Dallas Fed suggests that the price correction could reach as much as 15-20% in a pessimistic scenario. Therefore, further declines in the stock market and home prices could weigh on demand for home improvement projects,” Short wrote. However, the story for Home Depot remains constructive over the long term, according to the note. The analyst said Home Depot and Lowe’s together share 25% of the home improvement retail industry, meaning the two retailers are a little more insulated from pricing pressures in an inflationary environment. “As a result, even if the backdrop becomes a little more challenging, we would expect pricing and promotions to remain largely rational given that: a. The largest operators are EDLP retailers; b. The industry has some oligopolistic features within retail; c. Demand for non-discretionary home improvement projects has been relatively inelastic,” read the note. Shares of Home Depot are off more than 23% this year. The analyst’s $335 price target, cut from $390, is about 5% above where shares closed Monday. —CNBC’s Michael Bloom contributed to this report.
Banks finally got a long-awaited boost to interest rates this year after a decade of toiling in a low-rate environment. It didn’t go as planned. A year ago, big lenders including Bank of America and Wells Fargo were the top picks of the analyst community because they were expected to benefit from higher rates . Loan growth coupled with vast deposit bases would drive gains in interest income as the Federal Reserve hiked rates, the thinking went. While that trend played out, the bull case was spoiled by inflation at four-decade highs, which forced the Fed to boost rates more than expected , triggering concerns of a recession. In a downturn, banks are exposed to surging loan defaults, reduced loan demand and write-downs on assets. That’s why the KBW Bank Index slumped 23% through mid-December, worse than the 17% decline of the S & P 500 and on track for its worst year since 2008. “The interest rate-trade is getting long in the tooth, and meanwhile there are uncertainties on deposits, both on costs and outflows,” David Konrad, a KBW analyst, told CNBC in a phone interview. He cut his recommendation on the sector to market weight from overweight last week. Net interest income growth will probably peak in this year’s fourth quarter at 30% and slump to just 5% by the end of 2023, Konrad said in a Dec. 13 note. Among banks, he favors Goldman Sachs and Morgan Stanley because “they have already been operating in a recession” and their capital markets businesses will rebound before retail banking does, he said in the interview. Multiple headwinds Headwinds faced by banks next year include expectations for shrinking loan margins in the second half, higher reserves for bad loans, rising funding costs for deposits, higher expenses due to wage inflation and continued pressure on mortgage , wealth management and investment banking revenue, according to Raymond James analysts led by Daniel Tamayo. “With many of our positive catalysts from 2021-22 played out, we believe 2023 will be volatile for bank stocks, with the best performers those who can withstand headwinds for the industry,” Tamayo said in a Dec. 15 note. Tamayo favors smaller banks over megacaps for their lower valuations, less strict regulatory oversight and the possibility of mergers. He has a strong buy rating on Cadence Bank , Huntington Bancshares , First Republic and Wintrust Financial. Hold off until 2024? In that vein, Morgan Stanley analyst Betsy Graseck advised that it was too early to go long large cap banks. Investors should pile into the sector only after loan delinquencies peak or the Fed ends its balance sheet-shrinking campaign known as quantitative tightening, she said in a Dec. 6 note. “It’s not enough for the Fed to just slow or stop hiking rates, it has to end QT to get more positive on the banks,” Graseck said. That’s because “we expect that credit is likely to surprise more negatively than positively over the next 12 months as the economy deals with still-high inflation, higher borrowing costs” and rising joblessness, she added. The wait could be long: Morgan Stanley economists see QT ending in the first half of 2024. The bull case On the other hand, the group could rally next year if the economy manages a soft landing or mild recession, Bank of America analyst Ebrahim H. Poonawala said in a Dec. 11 note. Much of the downside for the industry is already embedded in current valuations, according to Baird analyst David George. That could set up the inverse of 2022 – a year in which pessimism leads to better-than-expected stock returns. Veteran analyst Mike Mayo of Wells Fargo said that bank stocks could pop 50% in 2023 by proving their resilience in a recession. That’s because they’ve been de-risked over more than a decade of increasingly stringent financial regulations. “We think banks should perform better in an upcoming recession than for any other in modern history,” Mayo said in a Dec. 14 note. “What seems most underappreciated is the degree that bank structural changes over the past decade prepare the industry for the cyclical challenges ahead.” His top picks are Bank of America, U.S. Bancorp and PNC Financial Services . The three lenders are prepared to navigate a downturn with strong credit quality, lower expenses and higher efficiency, he said. —CNBC’s Michael Bloom contributed to this report.
