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Earnings season is kicking off today, on Friday the 13th, but many are hoping for better luck as the biggest U.S. banks start the festivities. Set to report are Wall Street heavyweights JPMorgan Chase (JPM) and Bank of America (BAC), as well as Citigroup (C) and Wells Fargo (WFC). ETF behemoth BlackRock (BLK), and trust bank, Bank of New York Mellon (BK), will also disclose Q4 results.
Snapshot: As the Federal Reserve continues to raise rates, banks would be expected to see their net interest income rise in Q4 2022, but the earnings impact from higher rates isn’t quite that simple. As rates rise, so do banks’ costs on deposits. In addition, the increased cost of money has put a damper on new stock and debt issues, and mergers and acquisitions, which are businesses that Wall Street banks traditionally earn hefty fees.
Taking a broader view, the Fed’s aggressive tightening raises the risk that the economy will fall into a recession (the inverted yield curve already warns of such an outcome). With a dimmer economic outlook, banks are bracing by increasing their reserves for expected losses as credit quality typically suffers during economic downturns. With inflation raising wages and other costs, the estimates for banks’ Q4 earnings are mostly lower than the year-ago results, according to Wall Street consensus estimates, while analysts have also been lowering their expectations more than they’ve been increasing them.
Commentary: Morgan Stanley analyst Betsy Graseck forecasts that reserve ratios will increase by a median of 4 basis points Q/Q, “with provisions above the Street for every large cap bank that we cover.” Banks sensitive to the front end of the yield curve could produce further NII surprises. Due to inflation, Graseck also expects large cap banks to guide to 2023 median expense growth of ~4%, above consensus of 3%, noting that “fully 55%” of bank expenses are personnel costs. (10 comments)
The major averages recorded modest gains on Thursday, extending a rally seen in the previous session, as investors bet new inflation statistics will allow the Fed to slow the pace of its interest rate hikes. The Nasdaq Composite (COMP.IND) and Dow (DJI) both rose 0.6%, while the S&P 500 (SP500) finished the day 0.3% higher. Eight of the 11 S&P sectors also ended with gains, led by the greater-than-1% advances in Real Estate and Energy.
Quote: “Market participants are now pricing in just two more 25 basis point rate hikes, which means the market believes that the Federal Reserve will soon change its outlook,” analyst Leo Nelissen told Seeking Alpha, but said that the expectations were a “dangerous game.” Inflation is only coming down in select categories, like energy and vehicle prices, while other areas, like wages and housing, remain major issues the Fed will be forced to address to avoid a 1970s-style inflation rebound. “Any hawkish comments from the Fed or a reiteration of its outlook could be bad news for bulls.”
Specifically, the headline CPI slowed to a 6.5% annual increase in December, compared to the 7.1% seen in the prior reading. The core figure, which excludes the volatile food and energy sectors, showed a 5.7% rise, exactly matching projections. However, some “supercore” estimates, like the one that strips out things like medical insurance and airfare, still showed a 6.5% annualized pace.
Outlook: As everyone talks about eggs, markets are now pricing in a 96% probability of a 25 bps hike at the end of the month, compared to the 77% chance that was seen prior to the data release, according to the CME’s FedWatch Tool. (16 comments)
Say-on-Pay votes rarely get internalized by company executives and the board, but something new is brewing at Apple (NASDAQ:AAPL). The compensation committee and CEO Tim Cook have decided to reduce his annual compensation by 40% for 2023 in response to shareholder criticism. While his $3M base salary and $6M bonus will remain the same, the total amount of equity awards available will decrease from $75M to $40M, putting his total payout target at $49M.
Other changes: The percentage of Cook’s stock units linked to Apple’s performance will make up 75% of his overall equity award, up from 50% in 2022. That will more closely align his incentives with future growth performance instead of time spent at the company. Apple also lowered the number of restricted stock units Cook would receive if he retires before 2026.
“The Compensation Committee balanced shareholder feedback, Apple’s exceptional performance, and a recommendation from Mr. Cook to adjust his compensation in light of the feedback received,” Apple revealed in an SEC filing. “Taking into consideration Apple’s comparative size, scope, and performance, the Compensation Committee also intends to position Mr. Cook’s annual target compensation between the 80th and 90th percentiles relative to our primary peer group for future years.”
Go deeper: Executive compensation was a big discussion at last year’s annual meeting, when Institutional Shareholder Services recommended that Apple shareholders vote against Cook’s pay package. There has been some increasing pressure since then, especially as Apple deals with supply problems in China, weakening tech demand and the possibility of breaking its 3.5-year growth streak over the holiday quarter. While shares of Apple are up 6% YTD, they have fallen 24% over the past year, compared to the 27% decline of the tech-heavy Nasdaq Composite Index. (10 comments)
The U.S. Securities and Exchange Commission has brought charges against crypto lender Genesis Global Capital and crypto exchange Gemini Trust over the selling of unregistered securities to retail investors. The enforcement action focuses on Gemini Earn, a high-yield crypto lending product (with interest payments of up to 8%) that both Genesis and Gemini started offering in Feb. 2021.
Backdrop: Under the program, Genesis loaned Gemini users’ crypto and directed some of the profits back to Gemini, which acted as an agent to facilitate the transactions and deducted an agent fee (sometimes as high as 4.29%). In November, Genesis announced that investors would not be able to withdraw their assets because of insufficient liquidity as contagion spread from FTX’s collapse. The program was discontinued earlier this month, but its 340,000 investors participating in the scheme were still unable to withdraw their crypto assets and “suffered significant harm.”
The program was not registered as a securities offering when it clearly should have, as Genesis “exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors,” the SEC wrote. “As a result, investors lacked material information about the Gemini Earn program that would have been relevant to their investment decisions.”
Crypto crackdown: “Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC Chair Gary Gensler added in a statement. (2 comments)