☀️☕US Banks: Interest Income up, Reserves up, Profits down

11 January 2023

Happy Wednesday! 🌴🐪

US large-cap S&P 500 closed 0.7% UP ▲ Tech-heavy Nasdaq Composite closed 1.01% UP ▲ Pan European STOXX Europe 600 closed 0.57% DOWN 🔻 HK’s Hang Seng Index closed 0.27% DOWN 🔻 Japan’s Nikkei 225 closed 0.78% UP ▲ 


Powell doesn’t say “higher for longer”; MSFT: More OpenAI please!; A shallower-than-you-think Euro-Recession?; HK faster growth than SG


US Banks: Interest Income up, Reserves up, Profits down

📖   MoneyFitt EXPLAINS

🎓 Banks 


Stocks in the US were flat for much of the day but did rally into the close. Traders seemed happy that Fed Head Honcho Jay Powell did NOT say “higher for longer” for interest rates in 2023 as several fellow members of the FOMC (the Federal Open Market Committee, the interest rate setting arm of the central bank) have been saying — joined on Tuesday by Michelle Bowman, a Fed Governor, so one of the voting members. BUT the only reason he didn’t say rates would be “higher for longer” was that he didn’t talk about rates at all! Instead, he discussed central bank independence, a fascinating topic that traders ignored. 

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors”

The message from the Fed has actually been fairly consistent at least since the September FOMC meeting minutes were released in mid-October, which makes the market gyrations around “will he, won’t he” all the more bizarre, though that’s just the nature of what markets and traders do in the short term.

Next up is the December US inflation (CPI) report on Thursday, which is expected to show further slowing. Traders are betting on a rate hike of 0.25% at the next FOMC meeting in February. And the day after that we’ll have results from several of Wall Street’s biggest banks, leading the ​​fourth-quarter earnings season for the S&P 500 companies. See the FOCUS and EXPLAINER below (sneak peek: net interest income should be up, but probably peaking, while reserves ahead of a recession will be up a lot more, and may yet go higher.)


Microsoft (MSFT) is in talks to invest US$10 billion into OpenAI, the owner of ChatGPT and DALL-E, according to Semafor, as part of the high(-est) profile AI firm’s US$29 billion fund-raising. To put things in perspective, Microsoft shares rose less than 0.8% overnight, adding US$13 billion to its market capitalisation (number of shares X share price.) Market cap is NOT the same as cash in the bank, of course.

Image credit: OpenAI via The MoneyFitt Morning

Microsoft, recently reported to be introducing OpenAI functionality into its Bing search engine and Office products, will get 75% of OpenAI’s profits until it gets back its initial investment. After that Microsoft will have a 49% stake in OpenAI, with other investors at 49% and OpenAI’s nonprofit parent at 2%.

Right now, OpenAI charges developers about a penny to generate 20,000 words of text (and double that to create an image from a written prompt) while spending a few cents in computing power every time someone uses its chatbot.

(Venture capital firms such as Thrive and Peter Thiel’s Founders Fund are reportedly buying US$300 million from existing shareholders, which means that the company won’t receive any new money from them, while the VCs will be bound by the 100x capped return on the original investment value.)


Data are coming in supporting the view that the eurozone entered only a shallow recession in the last quarter despite the surge in energy prices over the year.

Industrial production in France rebounded much more strongly than expected in November, rising 2% from October and way higher than the 0.8% forecast by economists surveyed by Reuters. The day before, German industrial production for November was released, showing a low but better-than-expected 0.2% month-on-month increase.

The main industries in Germany are automotive, mechanical engineering, chemical and electrical industries, while in France they are vehicles, chemicals, metallurgy, mechanical engineering, electronics, food and textiles.

(Meanwhile, The World Bank halved its 2023 growth forecasts for the global economy to 1.7% and warned that any new shocks could tip the world into a recession​​ this year. Worth noting, but also remember that they don’t see any more or different data from any other economist out there.)


Admittedly from a miserably low base in 2022, when it shrank by 3.3%, Hong Kong’s economy is expected to grow by 3.3% according to a Bloomberg survey, driven by the border reopening and retail sales jumping by 10%.

In contrast, growth in rival financial and trading hub Singapore is projected to level off this year to 2% growth from 3.8% in 2022 as the US and Europe head for likely recessions. This year would be the first time since 2008 that HK grows faster than Singapore.


US Banks: Interest Income up, Reserves up, Profits down

JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) are expected to report another quarter of bumper revenues from their lending businesses but probably lower overall profits on Friday as they stock up on “reserves” ahead of the expected recession in 2023. Along with Morgan Stanley (MS) and Goldman Sachs (GS), which are reporting next Tuesday, the group could log an average 17% drop in net profit, according to Refinitiv.

Reserves are not actual losses made on loans that don’t get repaid, as many will in a recession, but money set aside as provisions in good times ahead of an expected increase in defaults. Loans that do go bad (“non-performing loans” or NPLs) are then deducted from those reserves at a future date. Analysts are expecting a combined US$5.7 billion in reserves in the quarter, 2.4 TIMES the level set aside the year before.

And the lending boom could also be drawing to a close as the rapid rate hike cycle last year nears its end and interest rates flatten out. Banks have been able to charge borrowers more without paying depositors as much since deposit rates tend to lag lending rate hikes. This lag effect boosts banks’ net interest income, which analysts expect for the four reporting banks to be 30% higher than in the same quarter in 2021.

GS and MS are more reliant on investment banking, trading and asset management. Very second-tier bank Jefferies reported a 35% decline in investment banking and capital markets revenue on Monday, as global investment banking revenue sank to $15.3 billion in the fourth quarter, according to Dealogic, down more than 50% from the year before.

What actually IS a bank, we hear you ask? 

See the Explainer below and learn 

other Letter B money terms in the excellent 

A to Z of Money Terms and Financial Jargon” 

project from our friends at 

The Money Awareness and Inclusion Awards (MAIAs)

Everyone is Invited… ​​”let’s make money better!”

Check out Letter A, Letter B (in comments), Letters C, D, E, F and G and now Letter H, too!! 

📖 MoneyFitt EXPLAINS

🎓 Banks

B is for Bank

– A bank is a licensed organisation permitted to accept deposits from customers, and lend out that same money, keeping only a fraction of the total as cash or very low risk short-term assets that enabling them to re-pay deposits if required.

An example?

– The most familiar types of bank are retail or high street banks, but other types of banks include commercial, investment and private banks.

More detail?

– Banks pay us interest to borrow our money (deposits) and receive interest from us when we borrow from them (loans) and make most of their profit from the difference between the two, as current and savings accounts pay much lower interest than loans charge.

Last note?

– Challenger or neo-banks are using technology of many different types to disrupt this cosy business arrangement, either by making services more easily available, lower cost or easier to compare.

Thanks and (bank) credit to The Money Awareness and Inclusion Awards (MAIAs)

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