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Why did banks earnings fall in the fourth quarter?

Big banks like JPMorgan Chase and Bank of America saw their profits fall following their reports in the fourth quarter. And this disappointing result has impacted equity trading last week.

JPMorgan's quarterly earnings slipped 15% to 9.31 billion, or $3.04 per share from a year earlier. Excluding the fee tied to the regional banking crisis and $743 million in investment losses, earnings would have been $3.97 per share, according to JPMorgan.

Bank of America shares fell last Friday after the firm reported declining fourth-quarter earnings amid hefty one-time charges. The bank said that it was hit by a pretax charge of $1.6 billion in the quarter related to the transition away from the London Interbank Offered Rate. Its net income fell to $3.1 billion, or 35 cents per share in the fourth quarter, down more than 50% from $7.1 billion, or 85 cents per share, a year ago.

JPMorgan Chase and Bank of America are just two prime examples of this disappointing fourth quarter in the banking industry. But they are not the only banks that have seen their earnings nosediving. Many other banks have experienced the same fate, and it seems that the reason for this decline in earnings is due to a set of factors.

First, many banks reported significant non-recurring expenses, such as legal settlements, restructuring costs, and job cuts. These charges lowered overall profits, despite some underlying improvements in core business activities.

Second, rising interest rates initially benefited banks by widening the gap between what they pay depositors and what they charge borrowers. However, the expectation of future rate cuts is now narrowing that gap, impacting banks' net interest income. That being said, with economic uncertainty, banks are setting aside more money to cover potential loan defaults. While this may not reflect immediate losses, it reduces reported earnings.

Third, although the economy remains resilient overall, there are some signs of increasing stress in the consumer loan market. Delinquencies and defaults on credit cards and other loans are starting to rise, which could lead to higher loan losses for banks in the future.

The banking industry is perhaps the industry that desperately needs the Federal Reserve to cut interest rates since its entire industry relies on interest income to make a profit. Cutting interest rates will certainly lead to a wider net interest margin. And this is because cutting interest rates leads to an increased demand for loans. Lower interest rates generally encourage borrowing by businesses and consumers. This increased demand for loans allows banks to charge higher interest rates on them, widening the spread between what they pay on deposits and what they earn on loans. This spread, known as the net interest margin, is a key driver of bank profitability.

Banks also borrow money, often from the Federal Reserve, to fund their lending activities. When the Fed cuts rates, the cost of this borrowing also decreases, further improving the bank's net interest margin.

It's important to note that despite these challenges, many banks remain profitable and optimistic about the overall economic outlook. They expect modest loan growth in 2024, which could partially offset the decline in net interest income. Additionally, the strong consumer balance sheet and resilient job market suggest that the risks of a major financial crisis are low.


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