Federal Reserve Board Vice Chair for Supervision Michael Barr testifies before a House Financial Services Committee hearing on the response to the bank failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, D.C., on March 29, 2023.
Kevin Lamarque | Reuters
The Federal Reserve said Wednesday that the biggest banks operating in the U.S. would be able to withstand a severe recession scenario while maintaining their ability to lend to consumers and corporations.
Each of the 31 banks in this year’s regulatory exercise cleared the hurdle of being able to absorb losses while maintaining more than the minimum required capital levels, the Fed said in a statement.
The stress test assumed that unemployment surges to 10%, commercial real estate values plunge 40% and housing prices fall 36%.
“This year’s results show that under our stress scenario, large banks would take nearly $685 billion in total hypothetical losses, yet still have considerably more capital than their minimum common equity requirements,” said Michael Barr, the Fed’s vice chair for supervision. “This is good news and underscores the usefulness of the extra capital that banks have built in recent years.”
The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. This year’s version included giants such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.
While no bank appeared to get badly tripped up by this year’s exercise, which had roughly the same assumptions as the 2023 test, the group’s aggregate capital levels fell 2.8 percentage points, which was worse than last year’s decline.
That is because the industry is holding more consumer credit card loans and more corporate bonds that have been downgraded. Lending margins have also been squeezed compared to last year, according to the Fed.
“While banks are well-positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch,” Barr said. “The financial system and its risks are always evolving, and we learned in the Great Recession the cost of failing to acknowledge shifting risks.”
The Fed also performed what it called an “exploratory analysis” of funding stresses and a trading meltdown that applied to only the eight biggest banks.
In this exercise, the companies appeared to avoid disaster, despite a sudden surge in the cost of deposits combined with a recession. In a scenario where five large hedge funds implode, the big banks would lose between $70 billion and $85 billion.
“The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks,” the Fed said.
Banks are expected to begin announcing their latest share repurchase plans on Friday.
Jane Fraser, CEO of Citigroup, 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
Banking regulators on Friday disclosed that they found weaknesses in the resolution plans of four of the eight largest American lenders.
The Federal Reserve and the Federal Deposit Insurance Corp. said the so-called living wills — plans for unwinding huge institutions in the event of distress or failure — of Citigroup, JPMorgan Chase, Goldman Sachs and Bank of America filed in 2023 were inadequate.
Regulators found fault with the way each of the banks planned to unwind their massive derivatives portfolios. Derivatives are Wall Street contracts tied to stocks, bonds, currencies or interest rates.
For example, when asked to quickly test Citigroup’s ability to unwind its contracts using different inputs than those chosen by the bank, the firm came up short, according to the regulators. That part of the exercise appears to have snared all the banks that struggled with the exam.
“An assessment of the covered company’s capability to unwind its derivatives portfolio under conditions that differ from those specified in the 2023 plan revealed that the firm’s capabilities have material limitations,” regulators said of Citigroup.
The living wills are a key regulatory exercise mandated in the aftermath of the 2008 global financial crisis. Every other year, the largest US. banks must submit their plans to credibly unwind themselves in the event of catastrophe. Banks with weaknesses have to address them in the next wave of living will submissions due in 2025.
While JPMorgan, Goldman and Bank of America’s plans were each deemed to have a “shortcoming” by both regulators, Citigroup was considered by the FDIC to have a more serious “deficiency,” meaning the plan wouldn’t allow for an orderly resolution under U.S. bankruptcy code.
Since the Fed didn’t concur with the FDIC on its assessment of Citigroup, the bank did receive the less-serious “shortcoming” grade.
“We are fully committed to addressing the issues identified by our regulators,” New York-based Citigroup said in a statement.
“While we’ve made substantial progress on our transformation, we’ve acknowledged that we have had to accelerate our work in certain areas,” the bank said. “More broadly, we continue to have confidence that Citi could be resolved without an adverse systemic impact or the need for taxpayer funds.”
JPMorgan, Goldman and Bank of America declined a request to comment from CNBC.
Sen. Elizabeth Warren, D-Mass., is accusing Federal Reserve Chair Jerome Powell of doing the financial industry’s bidding by considering changes to a sweeping set of regulations aimed at boosting the capital cushion that large American banks would be required to hold.
In a June 17 letter first obtained by CNBC, Warren asked Powell for a response to reports that “you are advocating for slashing in half” the increase in capital required under the proposals, known as the Basel III Endgame.
“I am disappointed by press reports indicating that you are personally intervening—after numerous meetings with big bank CEOs—to delay and water down the Basel III capital rules,” said Warren.
Last year, three U.S. banking regulators including the Federal Reserve unveiled the proposed rules, a long-expected regime shift around bank capital and risky activities such as trading and lending. The regulations incorporate new international standards created as a response to the 2008 global financial crisis.
“These rules are critical and long overdue, particularly in the wake of the Silicon Valley and Signature Bank failures, and as risks from the weak commercial real estate market and other economic threats ripple through the banking system,” Warren said.
Bank CEOs and their lobbying groups have said the increases are unnecessarily aggressive and would force the industry to curtail lending.
“It now appears that you are directly doing the bank industry’s bidding, rewarding them for their extensive personal lobbying of you,” Warren said in her letter. “Taking orders from the industry that caused the 2008 economic meltdown would sacrifice the financial security of middle-class and working families to line the pockets of wealthy investors and CEOs.”
She further criticized Powell, saying “regulatory rollbacks” under the Fed chair allowed the regional banking crisis of 2023 to happen and “enriched Jamie Dimon and his Wall Street cronies.”
Warren urged Powell to allow a Federal Reserve Board vote on the original, tougher Basel proposal by the end of this month. The window to finalize and approve the rules ahead of U.S. elections in November is closing, and analysts have said that the proposal could be delayed or killed if Donald Trump is reelected president.
“Instead of doing Mr. Dimon’s bidding, you should do your job and allow the Board to convene for a vote on a 16% capital increase by June 30th, as global regulators determined was necessary to prevent another financial crisis,” Warren said.
When asked for a response to Warren’s letter, a Fed spokesperson had this statement on Tuesday morning: “We have received the letter and plan to respond.”
Bank of America Chairman and CEO Brian Thomas Moynihan speaks during the U.S. Senate Banking, Housing and Urban Affairs Committee oversight hearing on Wall Street firms, on Capitol Hill in Washington, U.S., December 6, 2023.
Evelyn Hockstein | Reuters
U.S. consumers and businesses alike have turned cautious about spending this year because of elevated inflation and interest rates, according to Bank of America CEO Brian Moynihan.
Whether it’s households or small- to medium-sized businesses, Bank of America clients are slowing down the rate of purchases made for everything from hard goods to software, Moynihan said Thursday at a financial conference held in New York.
Consumer spending via card payments, checks and ATM withdrawals has grown about 3.5% this year to roughly $4 trillion, Moynihan said. That’s a sharp slowdown from the nearly 10% growth rate seen in May 2023, he said.
“Both of our customer bases that have a lot to do with how the American economy runs are saying, ‘You know what? I’m being careful, slowing things down,’” Moynihan said, referring to consumers and businesses.
The slowdown began last summer and is consistent with the “very low growth” environment of the period from 2016 through 2018, he said.
Nearly a year after the last Federal Reserve rate increase, consumers and businesses are wrestling with inflation and borrowing costs that remain higher than they are accustomed to. The Fed began efforts to tame inflation by hiking its benchmark rate starting in March 2022, hoping it could slow the economy without tipping it into recession.
Many economists believe the Fed is on track to pull off that feat, which has helped the stock market reach new highs this year. But consumers are still grappling with higher prices for goods and services, and that has impacted U.S. companies from McDonald’s to discount retailers as Americans adjust their behavior.
Food shoppers are hitting up more store locations in search of deals, according to Moynihan. “They’re going to three grocery stores instead of two, is one of the stats we see,” he said.
The now-tepid growth in overall spending is being propped up by travel and entertainment, while “other things have moderated, except for insurance payments,” Moynihan said. Growth in rent payments has slowed, he noted.
“We’ve got to keep the consumer in the game in the U.S. economy, because [they’re] such a big part of it,” Moynihan said. “They’re getting a little more tenuous, and that is due to everything going on around them.”
The same is true for small- and medium-sized businesses, the Bank of America CEO said. His company is the second-largest U.S. bank by assets, after JPMorgan Chase. Moynihan and other bank CEOs have a bird’s-eye view of the economy, given their coast-to-coast coverage of households and companies.
Business owners are saying, “‘I still feel good about my overall business, but I’m not hiring as much. I’m not buying equipment as fast. I’m not making software purchases as fast,’” Moynihan said.
The bank’s economists believe that inflation will take until the end of next year to get under control and that the Fed will begin cutting interest rates later this year, Moynihan said. The U.S. economy will probably grow at around a 2% level, avoiding recession, he added.
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals. Since the start of 2023, a CNBC analysis found that Wells Fargo made at least 17 senior-level hires in its corporate and investment banking (CIB) division. Leaning on the expertise of its rivals, many of the newly employed executives previously worked at the likes of JPMorgan Chase and other big banks. Expanding investment banking “improves our outlook” on Wells Fargo stock, according to Jeff Marks, director of portfolio analysis for the CNBC Investing Club. “Adding more fee-related revenues to the overall picture makes the bank’s profits less hostage to the bond market yield curve and could improve the overall return profile of the bank.” He added, “Wells Fargo could fetch a higher multiple in the market as a result.” It’s no wonder CEO Charlie Scharf wants a bigger slice of businesses like investment banking, which garner huge revenue from fees. Services like underwriting for initial public offerings (IPO) and facilitating mergers and acquisitions (M & A) allow banks to take home a percentage of these deals and advisory fees. Fees are a more durable and less volatile revenue stream than what Wells Fargo has historically focused on. This is important because, as Scharf said in the bank’s 2023 annual report , the CIB division has positioned Wells Fargo to “increase our fee-based revenues” and “increase our returns overall.” At the top of the recent hire list, however, is Doug Braunstein, a JPMorgan veteran who was brought in as vice chairman in February to help steer Wells Fargo’s corporate finance and advisory businesses. During nearly 20 years at JPMorgan, Braunstein held many roles including chief financial officer, head of investment banking in the Americas, and head of global mergers and acquisitions. Fernando Rivas was named earlier this month co-CEO of corporate and investment banking at Wells Fargo. Formerly head of North American Investment Banking at JPMorgan, Rivas will lead CIB together with Jonathan Weiss, who had been the sole CEO of the division since February 2020. Weiss, also a JPMorgan alum, has been at Wells Fargo since 2005. Rivas had been at JPMorgan for three decades. In addition to those high-profile hires, CNBC found that Wells Fargo also poached top talent from other financial behemoths such as Barclays , Deutsche Bank , Piper Sandler, and now-defunct Credit Suisse — all within the past year. A Wells Fargo spokesperson declined to comment on the total number of CIB-related hires across all levels in the division. However, Wells Fargo’s Scharf said in the press release announcing Rivas’ hire, “We have added over 50 senior bankers and traders since 2020 and have seen the positive impact with increased revenue and market share.” Break from tradition Management has long relied on interest-based revenue streams like net interest income (NII) from its retail and business customers. NII is the difference between what a firm makes on loans versus what it pays for customer deposits. Wells Fargo and other banks have benefited in recent years as the Federal Reserve began hiking interest rates in March 2022. That’s because the cost of borrowing goes up much more than what customers earn on deposits. However, as rates have stayed higher for longer, customers began to withdraw some of their deposits for higher-yielding offerings like money market funds. Wells Fargo said NII decreased 8% during the first quarter, citing interest rate dynamics. Full-year guidance for NII is also expected to decline in the 7% to 9% range. That’s the double-edged sword of rates, which are now expected to be cut by the Fed later this year, and why Wells Fargo was glad to see its CIB-related investments pay off in the first quarter. The division saw a 1.6% increase in revenue to $4.98 billion. During the April 12 post-earnings conference call, Scharf said the bank is “beginning to see early signs of share and fee growth which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue.” From 2019 to the end of 2023, Wells Fargo’s overall investment banking share moved up two ranks in the U.S. market to No. 6, management said in an annual report , citing Dealogic figures. More recent data indicates that Wells Fargo’s investment banking revenue share globally has jumped to No. 7 from No. 12 year-over-year, as of Tuesday. In the investing banking subset of M & A, Wells Fargo has been garnering more fees. The bank has been tapped for a series of high-profile deals as well, including Kroger ‘s attempted nearly $25 billion acquisition of Albertson’s in October 2022. The transaction is in limbo after the Federal Trade Commission filed a lawsuit to block the merger in February . In IPOs, Wells Fargo was among the lead book-running managers of recent IPOs: cruise line Viking and data management firm Rubrik . Wells Fargo shares, which began their upward trajectory back in November, gained more than 50% in the past 12 months — and about half that gain in 2024 alone. That’s roughly double the S & P 500 ‘s performance on both measures. The stock saw its highest close last week of $62.55 since mid-January 2018. Shares have pulled back a bit since then but remain only about 7.5% away from its all-time high close of $65.93 at the end of January 2018. In recognition of that strength, the Club trimmed its Wells Fargo position in late April and booked a healthy profit on the trade. While still bullish, we wanted to reduce the stock’s overall weighting in a show of portfolio discipline. It was near the 5% threshold that we don’t like exceeding in order to run a diversified portfolio. The Club has a 2 rating on the stock and a $62 price target . WFC mountain 2018-01-26 Wells Fargo since record high close on Jan. 26, 2018 Moving forward Wells Fargo’s CIB expansion bodes well once the firm’s Fed-imposed $1.95 trillion asset cap is gone. Although the timing is uncertain, Wells Fargo secured a key win with regulators in February after the Office of the Comptroller of the Currency terminated a penalty tied to the bank’s 2016 fake accounts scandal. That so-called consent order was believed to be a major factor in the Fed’s decision to cap Wells Fargo’s asset levels in 2017. Those regulatory burdens for past misdeeds at the bank predated Scharf’s tenure who has been clearing them since becoming CEO in 2019. Piper Sandler analyst Scott Siefers has said that Wells Fargo will be able to compete more effectively against other large Wall Street firms once the growth cap is removed. “Wells Fargo on a relative basis is very undersized in businesses such as investment banking,” Siefers told CNBC in March . “So, one part of the investment banking business is being able to commit capital. In other words, put some risk on your balance sheet. But thanks to the asset cap, Wells has not been able to build out its investment bank to the same degree, as have some of its other peers.” (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A woman walks past Wells Fargo bank in New York City, U.S., March 17, 2020.
Jeenah Moon | Reuters
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals.
Jamie Dimon, CEO of JPMorgan Chase, testifies during the Senate Banking, Housing and Urban Affairs Committee hearing titled Annual Oversight of Wall Street Firms, in the Hart Building on Dec. 6, 2023.
That was the message the bank’s longtime CEO gave analysts Monday during JPMorgan’s annual investor meeting. When pressed about the timing of a potential boost to the bank’s share repurchase program, Dimon did not mince words.
“I want to make it really clear, OK? We’re not going to buy back a lot of stock at these prices,” Dimon said.
JPMorgan, the biggest U.S. bank by assets, has seen its shares surge 40% over the past year, reaching a 52-week high of $205.88 on Monday before Dimon’s comments dinged the stock. That 12-month performance beats other banks, especially smaller firms recovering from the 2023 regional banking crisis.
It also makes the stock relatively pricey as measured by price to tangible book value, a commonly used industry metric. JPMorgan shares traded recently for around 2.4 times book value.
“Buying back stock of a financial company greatly in excess of two times tangible book is a mistake,” Dimon said. “We aren’t going to do it.”
Dimon’s comments about his company’s stock, as well as an acknowledgement that he may be nearing retirement, sent the bank’s shares down 4.5% Monday.
To be clear, JPMorgan has been repurchasing its stock under a previously authorized buyback plan. The bank resumed buybacks early last year after taking a pause to build up capital under new expected guidelines.
Dimon’s guidance simply means it is unlikely the program will be boosted anytime soon. JPMorgan is likely to purchase shares at a $2 billion to $2.5 billion quarterly clip, Portales Partners analyst Charles Peabody wrote in a March research note.
The JPMorgan CEO has often resisted pressure from investors and analysts that he deemed short-sighted. When interest rates were low, Dimon kept relatively high levels of cash, rather than plowing funds into low-yielding, long-term bonds. That helped JPMorgan outperform other lenders, including Bank of America, when interest rates jumped higher.
Dimon’s desire to hoard cash is not just because of impending capital rules. On multiple occasions Monday, he said he was “cautiously pessimistic” about economic risks, including those tied to inflation, interest rates, geopolitics and the reversal of the Federal Reserve’s bond-buying programs.
Markets are currently underappreciating those risks, Dimon said. For instance, prices of high-quality corporate bonds do not adequately reflect the potential for financial stress, Dimon said.
“The investment grade credit spread, which is almost the lowest it’s ever been, will be dead wrong,” Dimon said. “It’s just a matter of time.”
Since 2022, Dimon has warned of an economic “hurricane” set off by geopolitical risks and quantitative tightening. While the continued strength of the economy has surprised many on Wall Street, including Dimon, his concerns have informed his decision-making process ever since.
“We’ve been very, very consistent — if the stock goes up, we’ll buy less,” he said Monday. “When it comes down, we’ll buy more.”
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., at the UK Global Investment Summit at Hampton Court Palace in London, UK, on Monday, Nov. 27, 2023.
In a response to a question Monday about the bank’s succession planning, Dimon indicated that his expected tenure is less than five more years. That’s a key change from Dimon’s previous responses to succession questions, in which his standard answer had been that retirement was perpetually five years away.
“The timetable isn’t five years, anymore,” Dimon said at the New York-based bank’s annual investor meeting.
The ambiguity of Dimon’s plans has made succession timing at JPMorgan one of the persistent questions for the bank’s investors and analysts. Over nearly two decades, Dimon, 68, has made his lender the largest in America by assets, market capitalization and a number of other measures.
Still, Dimon added Monday that he still has “the energy that I’ve always had” in managing the sprawling company.
The decision of when he moves on will ultimately be up to JPMorgan’s board, Dimon said, and he exhorted investors and analysts to examine the executives who could take his place.
Atop the short list of candidates is Marianne Lake, CEO of JPMorgan’s consumer bank, and Jennifer Piepszak, who co-leads its commercial and investment bank; the executives were given their latest assignments in January.
“We’re on the way, we’re moving people around,” Dimon said.
Even when he steps down as CEO, however, it’s likely he will stay on as the bank’s chairman, JPMorgan has said.
British neobank Monzo said Wednesday that it’s raised another $190 million, lifting the total it’s raised so far this year to $610 million.
The company told CNBC it raised the cash from new investors including Hedosophia, a backer of top European fintechs including N26 and Qonto. CapitalG, Alphabet’s independent growth fund, also participated in the round.
Singaporean sovereign wealth fund GIC also participated in Monzo’s latest fundraise, a source familiar with the matter told CNBC. The source spoke on the condition of anonymity as details of GIC’s involvement aren’t yet public.
GIC declined to comment.
The latest funding values Monzo at roughly $5.2 billion, an increase on the $5 billion valuation it attained in March when it raised $430 million. The total $610 million round marks the single-biggest funding round for a European fintech in the past year, according to Dealroom data.
TS Anil, CEO of Monzo, told CNBC his firm plans to use the cash to build new products and accelerate its international expansion plans.
“At the heart of it we are a mission-oriented company that’s looking to build the single place where people can meet all of their financial needs,” Anil told CNBC in an exclusive interview.
“What’s exciting to me is that, as we pursue that mission of changing people’s relationship with money, we’ve built a business model that is congruent with that as well, with this model that is built entirely around the customer.”
Monzo entered the black for the first time last year, hitting profitability following the end of its 2023 fiscal year. Anil said Monzo’s looking to ramp up profits with diversification into other income generators, like lending and savings.
Notably, Anil said that Monzo’s planning to launch its first pensions product in the next six to nine months.
That would put it in competition with traditional lenders including Barclays and NatWest. Last year, NatWest acquired 85% of U.K. workplace pension services provider Cushon for £144 million ($180 million).
Monzo’s funding expansion caps off a busy year for the nine-year-old firm, which now counts more than 9 million retail customers in the U.K. — 2 million of whom joined Monzo last year alone — and over 400,000 business customers.
Anil said Monzo identified that about a third of people using the service had never invested previously — and, more notably, 45% of the women investing via the Monzo app are first-time investors.
Another big priority for Monzo in the coming months is international expansion.
The company recently restarted its U.S. expansion efforts, hiring a long-time executive from Block’s Cash App as its new U.S. CEO after earlier abandoning a bid to acquire a banking license from U.S. regulators.
For now, Anil says, Monzo’s team in the U.S. is primarily focusing on product to ensure that the service it has there is of high enough quality that it can compete with major incumbents like JPMorgan and Citibank.
The U.S. has proven notoriously difficult for European neobanks to crack.
Revolut, meanwhile, has failed to formally file an application for a U.S. bank charter yet despite having earlier said it intends to file a draft application for a U.S. bank license.
“What I like about how we’re approaching this is, at the heart of it, it’s not just words,” Anil told CNBC in an exclusive interview Tuesday.
“The necessary conditions for the U.S. for us is getting the product right. That’s what we’re spending our time and effort on there.”
European expansion is also on the cards, Anil said, although he didn’t commit to a date for when this will happen.
Longer term, Monzo is also planning to launch a mortgages product, which would see it compete much more aggressively with U.K. retail banks in the world of lending.
Monzo currently offers monthly installment plans and consumer loans via its app.
It also has a “Mortgage Tracker” feature which lets users track how much they’ve paid toward their mortgage and how much equity they’ve built.
But it’s yet to officially roll out a service that would let people apply for mortgages directly within its app.
Anil said Monzo is in the early stages of exploring partnerships with lenders to offer this.
He declined to name any prospective partners.
One thing Monzo hasn’t got any immediate plans for is an initial public offering.
Although he thinks Monzo will make a “great public company one day,” Anil said it’s still too early to talk of an IPO. He says he’s focused on growing Monzo at scale before reaching that milestone.
The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.
That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.
The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.
That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.
“When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”
Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.
Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.
Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.
Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.
While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.
That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.
At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.
If it were a classic Buffett bet — a big stake in a single company — that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.
Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.
“Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”
Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.
Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.
Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.
But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.
Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.
Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.
“The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”
Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.
It’s unclear how long regulators will allow Berkshire to shield its moves.
“I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”
JPMorgan Chase CEO and Chairman Jamie Dimon gestures as he speaks during the U.S. Senate Banking, Housing and Urban Affairs Committee oversight hearing on Wall Street firms, on Capitol Hill in Washington, D.C., on Dec. 6, 2023.
Evelyn Hockstein | Reuters
A Russian court sided with state-run lender VTB Bank in its efforts to recoup $439.5 million from JPMorgan Chase that the American lender froze in U.S. accounts after the Ukraine invasion.
The court ordered the seizure of funds in JPMorgan’s Russian accounts and “movable and immovable property,” including the bank’s stake in a Russian subsidiary, according to a court order published Wednesday.
The order came after VTB filed a suit last week in a St. Petersburg arbitration court, seeking to be made whole for funds frozen in the U.S., and asking for relief because JPMorgan has said it plans to exit Russia.
The next hearing in the Russian case is July 17.
JPMorgan declined to comment. VTB did not immediately respond to CNBC’s request for comment.
The order was the latest example of American banks getting caught between the demands of Western sanctions regimes and overseas interests. JPMorgan is the biggest U.S. bank by assets and run by veteran CEO Jamie Dimon.
Two years after Russia invaded Ukraine, the Biden administration has mounted an unprecedented set of sanctions, oil price caps and trade restrictions designed to weaken Moscow’s military machine.
On Wednesday, President Joe Biden signed into law a sweeping foreign aid bill that includes new powers for U.S. officials to locate and seize Russian assets in the U.S. It also boosted an ongoing American effort to convince European allies to release Russian state assets to assist Ukraine.
In its own lawsuit against VTB last week in the Southern District of New York, JPMorgan sought to block VTB’s effort, noting that U.S. law prohibits the bank from releasing VTB’s $439.5 million.
This leaves JPMorgan exposed to a nearly half-billion-dollar loss, for abiding by U.S. sanctions.
The American bank, seeking to block VTB’s effort, said the Russian company broke its contractual promise to seek relief in American courts, instead finding a friendlier venue in Russia.
JPMorgan said Russian courts have enabled similar efforts by Russian lenders against American or European banks at least a half dozen other times.
JPMorgan said it faced “certain and irreparable harm” from VTB’s efforts.
There are still some attractive yields to be found on certificates of deposits, including from some of the biggest banks in the U.S. For instance, JPMorgan right now is paying out an annual percentage yield of 5.4% on a one-year CD, via Fidelity Investments. Goldman Sachs , Morgan Stanley and Bank of America all have one-year offerings with yields of at least 5%, according to Fidelity’s website . They are what is known as brokered CDs, which are purchased through a brokerage firm like Fidelity, Schwab or Vanguard . While buyers can get bank CDs directly from the institution, they get a wide range of issuer options to choose from when buying through a brokerage firm. That means there may potentially be an opportunity to snag some additional yield. “From our experience, the brokered CD market is more competitive,” said Richard Carter, vice president of fixed income products and services at Fidelity. The firm has some 180 different brokered CDs available at different maturities, he said. Like traditional CDs, brokered CDs are offered in different maturities. They are also insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor , per bank and per ownership category. Like their smaller counterparts, big banks may also offer CDs to raise deposits pretty quickly and may target particular parts of the yield curve, Carter said. However, buyers should be aware of some key differences between brokered CDs and their traditional counterparts. For one, brokered CDs may be callable — meaning the issuing intuition can call the CD before its maturity date. For instance, JPMorgan’s one-year CD, with its 5.4% yield, can be called as early as Oct. 30, according to Fidelity’s website. While you’ll get your initial deposit back, there’s a chance you could earn that interest for a shorter period of time than expected. In the one-year category, Morgan Stanley Private Bank and Bank of America are not callable. Goldman Sachs has two new issue CDs offered — one with a 5.15% rate that is callable as early as July 30 and one with a 5% rate that is not callable. “Where it causes a real problem is on a longer-term CD,” explained Greg McBride, chief financial analyst at Bankrate.com. “You think you locked into a five-year CD and 12 or 18 months later it gets called. You get your money back and have to reinvest at a time when interest rates are lower.” It’s also important to understand your time frame before you buy a CD, whether from a bank or a brokerage firm. With bank CDs, you’ll pay a penalty if you want your money back before maturity. That penalty is stated at the outset when you buy the CD. With a brokered CD, you’ll have to sell it on the secondary market — and you may lose some of your principal. “What you get depends on what another investor is willing to pay for it,” McBride said. “If rates move against you, you can lose big, especially on a longer-term CD.” In addition, you may have to pay a transaction fee. In Fidelity’s case, it is $1 per $1,000 CD to sell your CD on the secondary market. A brokered CD also doesn’t necessarily mean a higher yield, McBride said. He suggests looking at top-yielding bank CDs, which he said tend to be pretty comparable. Those choosing brokered CDs may find it convenient if they already have investments at a specific brokerage firm, so all their accounts are in one place. In addition, for those who who want to invest more than the FDIC limit can buy CDs from multiple issuers. You can also easily build a CD ladder, which staggers maturities, said Carter. “In this world of uncertainty, another way of hedging risk is a ladder,” he said. “Some of the money is out into the future — if rates were to fall you have that locked in,” he added. “If rates were to rise, you have the shorter maturities on the ladder, which gives you the chance — if you want — to reinvest that principal.” Depending on your time frame, you may consider a one-year ladder with CD maturities three months apart, a two-year ladder with CD maturities six months apart, or a five-year ladder, with maturities one year apart, he said.
Investors will parse through regional bank results this week to deliberate how to trade a sector that has been weighed down by the prospect of higher-for-longer interest rates. Regional bank stocks have slid in anticipation of their results this week, with the SPDR S & P Regional Banking ETF (KRE) sliding by more than 7% this month. A slew of results are on deck this week, such as from U.S. Bancorp and KeyCorp , among others. For investors, what’s key this earnings season is the impact elevated interest rates may have on regional banks’ net interest income, as well as commentary around exposure to commercial real estate after New York Community Bank’s troubles this year. Net interest income is the difference between the revenue generated from loans and the interest paid on deposits. “What we’ve seen is deposit pressures escalate more than previously anticipated,” said Alexander Yokum, an analyst at CFRA Research, who has a neutral view on regional banks. “A lot of these regional banks, they have less deposits, so if they lose deposits, it can really impact their operating results,” Yokum said. “So, higher for longer, I think for a lot of regional banks, would be negative.” Thus far, reactions to results from the overall banking sector have been mixed. JPMorgan Chase shares dropped after the bank issued disappointing guidance on 2024 interest income, while Goldman Sachs shares climbed after the firm topped first-quarter estimates. M & T Bank shares rose this week post-earnings, while PNC shares on Tuesday dropped after its results. But some on Wall Street said they remain upbeat. Earlier this month, Goldman Sachs’ Ryan M. Nash said results are likely to be mixed, but that they “should mark the bottom (or close to it for most).” He continued, “The move from 4-6 cuts down to 2-3 shouldn’t have a meaningful impact on NII guides.” Bank of America’s Ebrahim H. Poonawala said this month he expects first-quarter earnings results to demonstrate resiliency, adding “regional banks with strong deposit franchises should be well-suited to compete in a structurally higher rate backdrop.” For investors, CFRA’s Yokum maintained that it’s important to remain a stock picker in the sector, adding they should choose firms that are well-capitalized with robust reserves. He also likes banks that are reducing their commercial real estate exposure. “For banks, I think it’s pretty important to be company-specific,” Yokum said. “I would really only pick the ones that you know, I feel like are strong from multiple categories.” Here’s what Wall Street analysts expect from regional banks this season. U.S. Bancorp U.S. Bancorp , which is set to report earnings on Wednesday, is rated as buy by a majority of analysts covering the stock, according to LSEG data. But some analysts worry about the setup for the stock going forward. “USB’s capital overhang has largely been alleviated with the Fed releasing USB from requirements to comply with Category II requirements by year-end 2024,” Citi’s Keith Horowitz wrote in an April note. “However, we continue to see downside to consensus estimates and USB trades at a relative premium on our implied cost of equity metric as the stock is viewed as high-quality and defensive, so we see better risk/reward elsewhere.” Horowitz has a neutral rating on U.S. Bank, as well as a price target of $45. The stock is down by more than 5% this year. Huntington Bancshares Huntington Bancshares is expected to release earnings on Friday. Shares of the Ohio-based firm have gained more than 2% this year, lagging the broader market. Analysts on average have a buy rating on the stock. Bank of America upgraded Huntington Bancshares to buy recently, saying the consensus view on Wall Street fails to appreciate the growth momentum in the bank. “We view HBAN as well positioned to navigate multiple macro-economic outcomes,” the firm’s Poonawala wrote in an April note. “Moreover, franchise investments and footprint should drive superior growth relative to most super-regional bank peers.” KeyCorp, Comerica KeyCorp and Comerica are both set to report earnings this week. Shares of Comerica and KeyCorp are down this year by 10% and 1%, respectively. Additionally, Comerica has a hold rating, according to CNBC’s analyst consensus tool. “Considering that their long-term rates are rising again, these are two banks that we think could have a tough couple of quarters here,” CFRA’s Yokum said. “They both do have pretty significant unrealized losses, and their net interest margins have gotten hit pretty hard.” “And they’ve seen pretty substantial non-interest bearing deposit outflows as well,” Yokum added. Other regional banks reporting this week include Fifth Third Bancorp .
Morgan Stanley on Tuesday posted results that topped analysts’ estimates for profit and revenue as wealth management, trading and investment banking exceeded expectations.
Here’s what the company reported:
Earnings: $2.02 a share, vs. $1.66 expected, according to LSEG
Revenue: $15.14 billion, vs. expected $14.41 billion
The bank said first-quarter profit rose 14% from a year earlier to $3.41 billion, or $2.02 a share, helped by rising results at each of its three main divisions. Revenue climbed 4% to $15.14 billion.
Shares of the bank jumped about 2.5%.
Wealth management revenue rose 4.9% to $6.88 billion, topping the StreetAccount estimate by $230 million, as rising markets helped boost fee revenue and offset a decline in interest income.
Equities trading revenue increased 4.1% to $2.84 billion, $160 million more than expected, fueled by derivatives volumes. Fixed income trading revenue slipped 3.5% to $2.49 billion, but that still topped expectations by $120 million.
Investment banking revenue jumped 16% to $1.45 billion, edging out the $1.40 billion estimate, as increases in debt and equity issuance offset lower fees from acquisitions.
The firm’s smallest division, investment management, was the only major business to underperform expectations. While revenue climbed 6.8% to $1.38 billion, it was below the $1.43 billion StreetAccount estimate.
CEO Ted Pick’s tenure had kicked off on a rocky note, as high interest rates have incentivized the bank’s wealth management customers to move cash into higher-yielding securities. The bank’s shares have declined nearly 7% this year before Tuesday.
But like rivals including Goldman Sachs and JPMorgan Chase, Morgan Stanley was helped by strong trading and investment banking results in the quarter.
Last week, JPMorgan, Wells Fargo and Citigroup each topped expectations for revenue and profit, a streak continued by Goldman on Monday and Bank of America on Tuesday.
Analysts questioned Pick about reports that multiple U.S. regulators are investigating Morgan Stanley for potential shortfalls in how it screens clients for its wealth management division.
“We’ve been focused on our client on-boarding and monitoring processes for a good while,” Pick said Tuesday. “We have been spending time, effort and money for multiple years, and it is ongoing. We’ve been on it and the costs associated with this are largely in the expense run rate.”
Bank of America on Tuesday reported first-quarter earnings that topped analysts’ estimates for profit and revenue on better-than-expected interest income and investment banking.
Here’s what the company reported:
Earnings: 83 cents a share adjusted, vs. 76 cents expected, according to LSEG
Revenue: $25.98 billion, vs. $25.46 billion expected
The bank said profit fell 18% to $6.67 billion, or 76 cents a share; excluding a $700 million FDIC assessment, profit was 83 cents a share. Revenue slipped 1.6% to $25.98 billion as net interest income declined from a year earlier.
Net interest income, or the difference between what the company earns from loans and investments and what it pays customers for their deposits, was $14.19 billion, topping the $13.93 billion StreetAccount estimate.
The bank’s interest income was a “slight positive surprise,” though it’s unclear if this means the metric will improve earlier than expected, Wells Fargo analyst Mike Mayo said Tuesday in a research note.
The bank’s total deposits of $1.95 trillion climbed roughly 1% from the fourth quarter, while loans were essentially unchanged at $1.05 trillion.
“I was unimpressed with deposits and loans being flat,” David Wagner, portfolio manager at Aptus Capital Advisors, said in an email. “The only areas that BAC did well was where other banks have shown strength.”
Bank of America CFO Alastair Borthwick told analysts Tuesday in a conference call that NII will likely dip in the second quarter to about $14 billion on drops in wealth management and markets interest income. Though it could grow in the second half of the year, he said.
NII has been declining in recent quarters as funding costs have climbed along with the rise in interest rates.
Shares of the bank fell more than 3%.
Bank of America’s share decline Tuesday has more to do with the rise in the 10 year Treasury yield than first quarter results, according to KBW analyst David Konrad. Shares of many banks have been yoked to yields in the past year, as rising yields means some bond and loan holdings decline in value.
Investment banking revenue jumped 35% to $1.57 billion, exceeding the $1.36 billion estimate and following a similar rise at rivals including Goldman Sachs and JPMorgan Chase.
It’s also considerably higher than the guidance given by Borthwick, who told analysts last month to expect investment banking revenue to rise by 10% to 15% from a year earlier.
The bank’s trading operations also edged out expectations. Fixed income revenue fell 3.6% to $3.31 billion, slightly beating the $3.24 billion estimate, and equities revenue rose 15% to $1.87 billion, compared with the $1.84 billion estimate.
David Solomon, Chairman & CEO Goldman Sachs, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 17th, 2024.
Adam Galici | CNBC
Goldman Sachs is scheduled to report first-quarter earnings before the opening bell Monday.
Here’s what Wall Street expects:
Earnings: $8.56 per share, according to LSEG
Revenue: $12.92 billion, according to LSEG
Trading Revenue: Fixed income of $3.64 billion and equities of $2.95 billion, per StreetAccount
Investing Banking Revenue: $1.77 billion, per StreetAccount
Goldman Sachs CEO David Solomon has taken his lumps in the past year, but hope is building for a turnaround.
Dormant capital markets and missteps tied to Solomon’s ill-fated push into retail banking should give way to stronger results this year.
Rivals JPMorgan Chase and Citigroup posted better-than-expected trading results and a rebound in investment banking fees in the first quarter; investors will be disappointed if Goldman doesn’t show similar gains.
Unlike more diversified rivals, Goldman gets most of its revenue from Wall Street activities. That can lead to outsized returns during boom times and underperformance when markets don’t cooperate.
After pivoting away from retail banking, Goldman’s new emphasis for growth has centered on its asset and wealth management division. The business could see gains from buoyant markets at the start of the year, though it also has taken write-downs tied to commercial real estate in the past.
Solomon may also field questions about the latest examples of an exodus in senior managers, including his global treasurer Philip Berlinski and Beth Hammack, co-head of the bank’s global financing group.
On Friday, JPMorgan, Citigroup and Wells Fargo each posted quarterly results that topped estimates.
This story is developing. Please check back for updates.
The pandemic accelerated changes at big banks, where Chase and Wells Fargo already have branches that look more like lounges than banks. But it’s not just Wall Street-sized banks where AI is disrupting the way things works.
Small, independent branches are also following, and experts and executives say they’ll use their small size and agility to their advantage. The local bank branch, with its traditional teller windows and long lines, will transform into an AI-infused, customer-centric financial services center, aiming to beat the big banks on the service that AI will allow them to provide customers.
“As a small bank, your only value proposition is service. Nothing is proprietary anymore,” said Christopher Naghibi, executive vice president and CEO of Irvine, California-based First Foundation Bank, which has 43 branches in five states. With just over $10 billion in assets, Naghibi helped shepherd First Foundation from a single branch in 2007 to its size today.
Naghibi envisions community bank branches with fewer employees and more AI. The employees would be freed to help customers reach their financial goals and not be stuck answering basic questions about recent transactions and account information.
“The teller line, as we see it today, will eventually die,” he said.
Naghibi isn’t alone among bank CEOs contemplating the AI future for financial workers and customer interactions.
Jamie Dimon, the veteran chairman and CEO of JPMorgan Chase, has written about artificial intelligence in his annual shareholder letters dating back to 2017. But his latest letter, released on Monday, was notable not only for his AI predictions — he wrote it could be as transformational as the printing press, the steam engine, electricity, computing and the internet — but also how he thinks the technology could impact the jobs of the bank’s more than 310,000 employees.
“Over time, we anticipate that our use of AI has the potential to augment virtually every job, as well as impact our workforce composition,” Dimon wrote. “It may reduce certain job categories or roles, but it may create others as well.”
Many of JPMorgan’s AI ambitions are taking place behind the scenes rather than at the teller window — it now has more than 2,000 AI and machine learning employees and data scientists working on 400 applications including fraud detection, marketing and risk controls, Dimon said. The bank is also exploring the use of generative AI in software engineering, customer service and ways to boost employee productivity.
For smaller banks, the customer interaction may be the critical application, with AI freeing a bank’s resources from answering routine questions..
“This will be at the forefront of how we engage in service,” Naghibi said. “You can ask AI, ‘Hey, did this happen? Did this check clear? How many payments have I made to this person?’ You’ll get answers directly from AI.”
Customers will be able to go in 24/7 with a special access technology and pay bills by touchscreens, send a wire at midnight, and see transactions updated in real-time. “Effectively, a small bank’s branch will be a wall of screens,” he said.
Security will improve at transformed branches as paper money becomes less plentiful and more locked into machines. The AI will bring a lot more security to branches also, with plenty of cameras, biometrics used for access, and PIN codes a thing of the past. It will also help in more extreme scenarios. “If someone has a weapon, AI can automatically see that it is a weapon, sense it, and prevent a problem,” Naghibi said.
JackieVerkuyl, chief administrative officer of the eight-branch BAC Community Bank in Stockton, California, a commercial and consumer bank with over $800 million deposits, says implementation of generative AI is already well underway and transforming the small bank. “The AI is getting smarter every day,” she said.
But while the corner bank will become an AI-infused financial services center, Verkuyl says generative AI will bring the same services to phones, far beyond the capability of current apps. BAC uses an app called Smart Alac (an acronym for All Access Connection), developed by San Francisco-based Agent IQ, which answers customer questions and matches them with a BAC banker who becomes their assigned point of contact. “This allows community and regional banks to provide self-service AI and have a relationship-based banking experience; every customer has a primary point of contact,” said Slaven Bilac, CEO of Agent IQ, a AI-powered customer support platform.
AI distills all the questions that customers are asking Smart Alac and provides a report to Verkuyl, allowing her to tailor the experience more. “We get lots and lots of questions about debit cards, so we created a whole menu that customers can help themselves to,” she said.
“Chase and Wells Fargo’s advantage over BAC is the amount of data they have. We can provide AI benefits without large amounts of know-how from BAC’s team,” Bilac said.
Not everyone in the industry is convinced.
The way a bank controls and shares large amounts of data with AI will be critical to effective transformation, according to Ken Tumin, a senior analyst at LendingTree. Banks have to give AI access to enough data to be effective, from account disclosures to frequently asked questions. “Unless a bank is committed to generating and maintaining high quality and comprehensive data, the use of AI in customer service will likely result in more customers being aggravated than pleased,” he said.
The Independent Community Banking Association, a trade group for small banks, doesn’t think AI can outshine the human element in a relationship. While AI will be a significant factor, “it will never match the local knowledge and personal relationships that are crucial to helping a first-time homebuyer get a mortgage or helping a small business or farm finance its operations,” said ICBA assistant vice president and regulatory counsel Mickey Marshall.
But bankers like Naghibi believe AI will allow small banks to become more involved in their communities, and in effect, more human.
“Right now, getting branch managers to go out into the community and get business is tough. We are not a large, important bank; people are not going to come to us. You have to go out and build relationships,” Naghibi said. “If generative AI is in place, you as a branch manager should be going to get business.”
Multiple human and tech-centered connections serve as “touchpoints” to the consumer, Naghibi said, and “the more touchpoints the bank has in their financial lives, the more we can be involved in their lives. As a community bank, that is where the edge is.”
“Community banking needs to change; every single one of my clients has my mobile number,” he added. “People don’t want untouchable and unreachable. Making local bankers more accessible is the promise of AI.”
Ebrahim Poonawala, Band of America Securities head of North American banks research, joins ‘Power Lunch’ to discuss if he saw any concerns from bank earnings, what the bank stocks are reacting to, and more.
