Bank of America Corporation’s BAC CEO, Brian Moynihan, believes that after the series of interest-rate cuts by the Federal Reserve to cushion the U.S. economy from the pandemic-induced uncertainty, consumer spending has slowed down.
Moynihan said that the slowdown in consumer spending shows that the Fed has “won the war” in its fight to cool the economy and bring down inflation.
However, now, given the expectation of negative economic growth/recession, interest rates are not projected to decline until March-April 2024.
While BofA’s consumer banking business acted as a tailwind in the first quarter of this year (revenues rose 21.5% year over year, and combined credit and debit card spending rose 6%), Moynihan expects loan growth in the second quarter to be a bit less than what was expected earlier.
Across the banking industry, lending is expected to be flattish or low for the foreseeable future.
Per Moynihan, banks, in general, are expected to lose an additional $500-$750 billion in deposits across the industry after experiencing heavy outflows because of the failure of the three banks in the first quarter of this year.
In addition to providing an outlook for the consumer lending business, Moynihan said that he expects the company’s investment banking (“IB”) fees and trading revenues to be broadly flat in the second quarter.
In first-quarter 2023, Bank of America’s trading numbers were impressive. Sales and trading revenues (excluding net DVA) were up 9% from the prior-year quarter. Fixed-income trading fees rose 29%, while equity trading income decreased 19%.
However, total IB fees tanked 24.1%, reflecting the weak industry-wide performance of the underwriting business. Advisory fees plunged 28.7%.
Over the past six months, shares of BAC have declined 19.5% compared with the industry’s fall of 11.7%.
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Currently, Bank of America carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The current challenging economic environment has led to a persistent slowdown in the IB business. Factors such as geopolitical tensions, inflation, rising interest rates and fears of a global recession have acted as headwinds for mergers and acquisitions.
Thus, deal volume and total deal value numbers have crashed. For the same reasons, IPOs, follow-up equity issuances and bond issuances have dried up.
Thus, similar to BofA, Morgan Stanley’s MS trading and IB outlook looks bleak for the near term.
Per Morgan Stanley’s co-president, Andy Saperstein, the firm expects a year-over-year decline in its trading and IB revenues in the second quarter of 2023.
Saperstein believes that because of a more challenging economic environment, Morgan Stanley’s sales and trading “results will be notably down year over year versus a strong second quarter last year,” while “investment banking is also very challenged."
Because of this challenging economic environment, Morgan Stanley has been compelled to reconsider its headcount. MS has been considering cutting around 7% of jobs in the Asia-Pacific region (excluding Japan). This is part of the broader 3,000 IB job cuts that the company announced earlier.
Similarly, in February, it was reported that Bank of America was planning to cut jobs in its investment bank. The cuts are expected to have affected less than 200 bankers globally.
Like MS and BAC, Citigroup C has been taking steps in its IB and wealth management divisions.
This March, Citigroup initiated a round of job cuts, slashing hundreds of jobs across the firm, which accounted for less than 1% of its total workforce. According to people familiar with the matter, who asked not to be identified, the company’s IB division, its operations and technology organization, and the U.S. mortgage-underwriting division were among those affected.
In its IB division, Citigroup was struggling because of the industry-wide slowdown in deal-making. In its mortgage division, the company was grappling with reduced mortgage demand because of rising prices and a rapid increase in mortgage rates.
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