🎙️ Margin Compression

Today’s newsletter is heavy on banks. From what their earnings tell us about the economy to how they’re leading the way with integrating artificial intelligence and what that may mean for the future of finance.

For example, investment banking profits grew as booming financial markets lured companies to issue stock and raise debt, while growing credit card balances show cracks in ongoing consumer strength.

Meanwhile, our charts of the day show how inflation has impacted different sections of the economy differently. You might be surprised by which areas prices are rising fastest versus where they’re actually falling.

Dive in ⬇️

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Banks kick off earnings season

• The worst part of a Wall Street career could be ending

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🏁 Banks Kickoff Earnings Season

Welcome to earnings season, folks. Per usual, the big banks kicked off the onslaught of Q1 corporate earnings reports that will come in the next few weeks.

How’d they do?

JPMorgan

With a $530 billion market capitalization, JPMorgan is the biggest of America’s big banks. Investors weren’t thrilled with JPM’s results, sending the stock down over 5% as its net interest income—a key metric for banks—fell short of analysts’ expectations.

Still, its $23.1 billion of net interest income (NII) for Q1 2024 was 11% higher than the same period last year, boosted by the higher interest rates it can charge on everything from mortgages to credit cards to small business loans.

• According to JPMorgan’s CEO Jamie Dimon, “margin compression” is to blame for the bank falling short of NII projections.
  

• That is, the bank must pay higher rates to retain depositors, reducing the margin between what it can lend money at and what it pays for deposits (which largely finances the bank’s lending business).

Wells Fargo

Wells Fargo painted a similar picture to JPMorgan, failing to hit investors’ hopes for net interest income while loan growth was weak and pressure increased to pay depositors more.

At $12.2 billion in quarterly NII, that’s over 8% lower than from the same period last year. Revenue, however, came in strong for the bank overall, supported by growing investment advisory fees and brokerage commissions — a testament to how a rising stock market over the past year supports financial services businesses.

• WFC’s CEO explained that “an increase in non-interest income more than offset an expected decline in net interest income.” So, other parts of the bank’s business are making up for declines in lending profits.
  

• Wells Fargo’s commercial real estate portfolio suffered $187 million in losses, but its CEO suggested that its commercial-property loans "look pretty good in most cases” despite likely not hitting a broader bottom for the commercial real estate industry yet.

Investors had seemingly mixed responses, pushing the stock higher and lower throughout the day.

Citi

Last but not least, Citigroup stood out from JPM and WFC, beating analysts’ profit projections. It earned $1.58 per share versus Wall Street’s $1.23 per share estimates.

More credit card spending and larger balances supported Citi’s commercial banking business, while more companies hired Citigroup’s investment bankers to help them raise money through bond sales.

• Citi’s “capital markets desks” earned over $570 million in fees for underwriting debt and stock sales.
  

• Its net interest income, too, came in stronger than expected, rising 1.2% from last quarter.
  

• Meanwhile, the bank is a third of the way through a restructuring that will cut 20,000 jobs. That, and more, contributed to the bank’s strong quarterly profits.

After initially jumping higher, Citi’s shares fell modestly throughout the day.

Read more: JPM, WFC, CITI

More Headlines

🎓 White House cancels $7.4 billion in student loans

🗣️ OpenAI makes ChatGPT more direct, less verbose

👮 Morgan Stanely wealth management under investigation, per WSJ

😮 Cathie Wood’s Ark announces OpenAI stake 

👨🏻‍💻 Denver and Boulder poach more tech workers from California

🚨 Roku says more than 500,000 accounts impacted by cyber attack

💼 The Worst Part of a Wall Street Career Could Be Ending

No more all-nighters, with Chinese takeout containers and pizza boxes piling up on the side table, while trying to navigate a complex Excel file.

Artificial intelligence tools can replace much of Wall Street’s entry-level white-collar work, raising tough questions about the future of finance, according to a pretty eye-opening New York Times story this week. 

• AI is already revolutionizing Wall Street by automating and speeding up much of the entry-level work traditionally done by investment banking analysts. Tasks such as creating presentations, number-crunching in Excel, and drafting financial documents can now be performed more efficiently by AI, raising questions about the future demand for human analysts.
  

• Remember, the AI analysts don’t get tired, hungry, or upset. They also don’t seem to mind working long hours without a pay raise or bonus. 

Socrates! Major banks like Goldman Sachs, Morgan Stanley, and Deutsche Bank are testing AI tools, some under code names like "Socrates," which can perform tasks that used to take hours or even days in seconds. Executives are considering reducing the hiring of junior analysts by up to two-thirds and cutting their pay, arguing that the jobs are now less demanding.

• Per NYT: “Among Goldman Sachs’s AI efforts is a tool under development that can transfigure a lengthy PowerPoint document into a formal “S-1,” the legalese-packed document for initial public offerings required for all listed companies. The software takes less than a second to complete the job.”
  

• BNY Mellon’s CEO noted that his analysts could wake up two hours later because AI can study economic data overnight and create a written draft of analysis for them to work from.
  

• At Morgan Stanley, AI is getting into “every area of what we do,” including determining the proper mix of investments for its well-off clients.

Deutsche Bank uploads financial data into proprietary AI tools that can instantaneously answer questions about publicly traded companies and create summary documents on complementary financial moves that might benefit a client.

Why it matters:

The balance of power: While AI is seen as a powerful tool that can improve efficiency and productivity, there are concerns about its impact on employment and the balance of power within Wall Street firms. AI will likely shift power toward technologists who program the tools rather than the bankers who use them.

• Despite AI's potential to transform the industry, its full integration is still in the testing phase and requires regulatory approval. The technology isn’t limited to investment banking; it’s being explored across wealth management and research analysis, among other areas.

The bottom line: AI is poised to transform Wall Street, challenging the traditional roles of entry-level analysts and prompting banks to reconsider their hiring and training philosophy. 

Read more

Recommended Reading: Carbon Finance

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Quick Poll

Yesterday, we asked: Have you become a more active golfer since the pandemic?

— Wrote one reader, “Great article on the rise in golf participants…Being in Vegas we have seen all sides of course development and closures. Water is very limited, and we have had 3 courses closed in the last 10 years. The popularity of Top Golf and other golf “hangouts” has now caught on to the bar scene where you can rent a simulator in a bar. I guess if we ever get rain in Vegas, you can go inside and tee it up!”

— On team never play, another said, “I’m with Mark Twain on this one.” (Mark Twain is credited with calling golf “a good walk spoiled.”)

— This reader, though, is playing more: “The pandemic period assisted my interest higher to go out and play. Now retired, I’m playing 2x-3x per week after joining a senior group.”

See you next time!

That's it for today on We Study Markets!

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