Authored by: Adrian Galano, Lanz Lebrilla, Marianne Lolarga
Edited by: Jared Go, Elijah Soriano
Latest Economic Data
Philippine Economic Data
YoY Inflation eases to 2.8% in January amid stabilization of food prices
BSP keeps RRP held constant at 6.50%
Unemployment rate decreased to 3.1% in December
GDP Q4 YoY growth rate at 5.6%, beating expectations
US Economic Data
YoY Inflation accelerated to 3.4% in December
Unemployment rate remained at 3.7% in January
The Fed keeps the Federal Funds Rate at 5.25%
GDP Q4 YoY growth rate at 3.3%, beating expectations
Disappointing Bank Earnings
January proved challenging for major US banks, which suffered disappointing quarterly performances by the end of 2023 despite incurring record bank earnings throughout the year.
JPMorgan, the largest US bank, reported its revenues grew by 23% to $158 billion, as well as profits by 32% to $49.6 billion— their most profitable year on record. However, its fourth-quarter profits fell by 15% to $9.3 billion (Goodkind and Hur, 2024). Other banks too would experience similar discrepancies and report falling bank earnings.
One major component of a bank’s total revenue is its interest income, earned through loans, mortgages, and other interest-bearing assets. JPMorgan reported $90 billion in net interest income in 2023. But with interest rates now peaking, it is expected to fall to $88 billion this year. Wells Fargo anticipates that its net interest income for 2024 may be between 7% and 9% less than the $52.4 billion it earned in 2023. Citigroup also expects its net interest income to fall this year (Welsch, 2024).
One of the main reasons why the profits of major banks plunged in the fourth quarter has something to do with the aftermath of last year’s regional bank crisis sparked by the collapse of the Silicon Valley Bank (SVB) (Goodkind and Hur, 2024).
During this event, the Federal Deposit Insurance Corporation (FDIC) stepped in to recover losses that resulted from the said crisis (Goodkind and Hur, 2024). The FDIC spent approximately $23 billion of its deposit insurance fund to recover such losses and to replenish the said fund, it charged a special assessment fee of 0.125% to uninsured deposits of lenders in excess of over $5 billion (Goodkind and Hur, 2024; Schroeder, 2023). This fee amounted to a total of around $16.3 billion and the major US banks mostly paid for it, especially banks like JPMorgan Chase & Co. and the Bank of America (Schroeder, 2023).
The FDIC is an agency that is responsible for the protection of depositors against losses in their insured deposits in the event of a bank failure (FDIC, n.d.). Its duty is to provide deposit insurance of up to $250,000 (FDIC, n.d.). But when the collapse of the SVB happened, a large portion of the deposits held by the bank were above $250,000 (Christiansen et al., 2023). Despite this, the bank was granted a “systemic risk exception,” enabling the FDIC to fully recover the losses suffered by the depositors in the bank even if many of the bank’s deposits were over $250,000 (Lichtenberg, 2023). Aside from the SVB, the FDIC also dealt with the collapse of other banks such as the Signature Bank and the Silvergate Bank which occurred during the regional bank crisis (Smolenski, 2023). All the recoupment of losses from the bank crisis cost the FDIC a significant amount of its deposit insurance fund, which is why it decided to charge special assessment fees to 114 banks (Banjeree & Seay, 2023). Such fees took a toll on profits earned by the major banks, which explains their disappointing financial performance in the fourth quarter (Goodkind and Hur, 2024).
Effects of the Crisis on the US Stock Market
The disappointing earnings season of banking institutions can be tracked down through the movement of their stock prices in the market. The S&P 500 particularly, is referred to by investors and analysts as the best measurement of stock market performance in the US (Ashbrun, 2024).
Despite a growing GDP and robust consumption, the S&P 500 fell by 0.4% from 12th - 16th January (Laidley 2024), when bank earnings were publicly released.
A subset of the index, known as the S&P 500 Financials, also fell by approximately 2%, which solely includes institutions that primarily engage in exchanges of securities and capital market activities (S&P Global, 2018). The fall was mostly attributed to the disappointing earnings reports of major banks. Bank earnings took a toll as PNC Financial Services Group presented a revenue slip of 7% and a whopping net income loss of 43%, which moved down its shares after releasing its results (Heeb, 2024). Moreover, the stock price of Bank of America Corporation (BAC) decreased by 1.1% after its revenues fell short (Zacks Equity Research, 2024).
Source: TradingView
Coming from the results of the crisis in early 2023, the special assessment imposed by FDIC amounted to $16.3 billion which 114 banks were collectively required to pay as mentioned earlier (Banjeree & Seay, 2023). With this, JPMorgan, being the largest bank by US assets, faced a huge toll as its net income and revenue fell below expectations after having to pay about $2.9 billion. Similarly, the stock slip experienced by BAC was due to FDIC regulatory charge in the fourth quarter of 2023 (Laidley, 2024a). Another reason for these low earnings is because of increasing deposit costs and muted loan demand (Nishant & Siani, 2024). Net interest income last year decreased by 8% on average, but banks with huge client bases and diverse portfolios such as JPMorgan and Citibank came out superior compared to commercial regional banks which faced double-figure declines (Narron & Ralph, 2024).
The rising interest rates from the Fed last year have urged banks to give off high payouts to their depositors who are searching for higher-yielding securities, which became the main reason for the decline in total income.
Expectations
Source: Federal Reserve
The Fed decided to hold the Federal Funds Rate constant in its previous FOMC meeting at a range of 5.25% - 5.5% (Federal Reserve, 2024). This is done to tackle and keep inflation at the target range of 2% without disturbing employment rates (Zahn, 2024).
With a strong labor market and strong economic growth, and inflation continuing its downward trend, the Fed is unlikely to cut rates in its next meeting.
Despite this, investors still have something to look forward to. One of which is a rallying bond market, which has been active since October (Royal, 2024). One of the catalysts behind this bond rally may be the expectation that the federal funds rate is expected to be lower later this year. Roughly 15 participants in the Federal Open Market Committee (FOMC) forecast it to be between 5.0% - 4.0% as shown by the Fed’s dot plot below (Federal Reserve Board, 2023).
Conclusion
Source: TradingView
When the Federal Reserve announced that it decided to hold rates constant, there were negative reactions in the US and Philippine Stock Market. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite Index all fell by 0.82%, 1.61%, and 2.23% respectively. Federal Reserve Chairman Jerome Powell stated that rate cuts will not happen soon until there is evidence of inflation trending towards 2%. This tempered the hopes of the investors for a rate cut, which then triggered a sell-off in Wall Street (Llanos, 2024; Mercurio, 2024). Despite this news from the Fed and sell-off that came with it, the market continued its rally afterwards.
Source: TradingView
As for the Philippine stock market, the Philippine Stock Exchange index (PSEi) declined by 0.35%.
Philstocks Financial research and engagement officer Mikhail Plopenio attributed the local stock market decline to the negative spillovers of the Wall Street downturn following the announcement of the Federal Reserve (Mercurio, 2024). Similarly to the US, the PSEi continued to rally as well after the downturn reflecting a more optimistic market sentiment.
Source: TradingView
The US 10Y treasury bond yield decreased by 13.1 basis points to 3.926% as seen in the figure below (Lash, 2024). In the foreign exchange market, the dollar weakened against the peso by 0.36% (Lash, 2024; Cigaral; 2024). According to Domini Velasquez, chief economist of China Bank Corporation, the dollar depreciated because investors are concerned about the regional banks in the US as well as the declining share prices (Cigaral, 2024). With the Federal Reserve still committed to tempering inflation, it should be expected that a rate cut may not happen in the next few months. The trend of inflation could be a crucial clue on whether or not the Federal Reserve will become more dovish over time.
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