Flagging loan margins, one-off charges, drag down profit of major US banks

On Friday, US equity markets closed mixed ahead of a three-day weekend, with the S&P 500 and Nasdaq posting weekly gains. Favorable inflation data conflicted with mixed earnings from major banks, including Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, impacted by FDIC assessments. The S&P 500 rose 0.1%, the Dow fell 0.3%, and the Nasdaq increased 3.1% for the week.  The Russell 2000 was little changed for the week but down 3.8% year-to-date. The 10-year Treasury yield dropped to 3.943%, and the VIX rose to 12.70. Retailers and consumer discretionary shares weakened, while energy shares gained. Elsewhere, European equities also saw healthy gains, with Airbus leading gains after reporting record orders in 2023, while luxury shares in Paris declined due to a profit warning by Burberry.  

Summary for 15.01.2024 

• Most Asian equities rose this morning, with Japan’s Nikkei 225 hitting a 34-year high, fuelled by expectations of an early US interest rate cut. Chinese shares faced some disappointment due to the People’s Bank of China keeping lending rates unchanged, revealing limited room for monetary easing. Focus remains on economic cues, including Chinese GDP data and Japanese inflation. The Taiwan election result, where DPP candidate William Lai won, maintained the status quo, with Beijing’s reaction closely watched. Hong Kong’s Hang Seng rose slightly, while Australia’s ASX 200 and South Korea’s KOSPI increased 0.1%.  
• European shares are set to extend gains on interest-rate optimism while US markets will remain closed today in remembrance of Martin Luther King Day. 
• Oil prices rose on Monday, marking a third consecutive gain as US and British strikes to prevent Houthi attacks in Yemen fuelled concerns of supply disruptions. Tankers altered routes in response to the strikes, and the Houthi militia threatened a strong response.  In Libya, protests posed additional shutdown threats after the closure of the Sharara field, removing 300,000 barrels per day.  Despite these concerns, growing non-OPEC oil production, particularly in the US, and demand uncertainties in China continued to weigh on global oil prices. 
• On Friday, the Labor Department reported an unexpected 0.1% monthly decline in the overall Producer Price Index (PPI) for December, contrary to expectations for a 0.1% gain. Core PPI was unchanged from November, against expectations for a 0.2% increase. The PPI report came a day after slightly stronger-than-expected Consumer Price Index (CPI) numbers appeared to undercut investor expectations for imminent rate cuts from the Federal Reserve. 
• Baidu’s Hong Kong shares fell up to 10% this morning after reports that its flagship Ernie AI was used in testing by a People’s Liberation Army laboratory, raising concerns of potential US sanctions. Baidu denied affiliation with the lab, but fears grew amid US-China exploration of AI in military applications. China’s AI sector faces challenges from US restrictions on chip sales and reciprocal sanctions. 
• Germany is reportedly reconsidering a merger between Deutsche Bank and Commerzbank, five years after a failed attempt. Finance Minister Christian Lindner is open to selling the government’s 15% stake in Commerzbank to raise funds. Deutsche Bank’s interest in diversifying from volatile investment banking earnings has fuelled internal discussions. However, obstacles include Deutsche Bank’s low valuation, potential asset write-downs, and the challenge of merging overlapping businesses. The German government plans to raise up to €4 billion by selling stakes in various companies this year. 
• Grifols confirmed that Chinese home appliance maker Haier Group still intends to proceed with the acquisition of a 20% stake in Shanghai RAAS Blood Products. Grifols, which currently owns 26.58% in Shanghai RAAS, stated that if Haier were to back out, it would be a violation of the sale deal and could lead to legal actions. The confirmation follows speculations sparked by a short-seller’s report questioning Grifols’ accounting practices, causing a drop in Grifols’ shares. 
• Chinese fashion retailer Shein is seeking approval from Beijing to go public in the U.S., a move that could complicate its listing plans. Shein’s US IPO has faced political opposition, with lawmakers urging the SEC to block it until forced labour concerns are addressed. The company, valued at $66 billion, filed for the IPO with the Chinese regulator, subjecting it to Beijing’s new listing rules. Shein moved its headquarters to Singapore in 2022 but remains subject to Chinese rules due to its business activities in the country. The SEC has yet to respond to Shein’s IPO filing. 
• FedEx CEO Raj Subramaniam stated that despite disruptions in the Red Sea causing delays in shipping transit times, the company hasn’t observed a significant shift to air freight. He noted that air freight rates have remained stable. 
• Microsoft surpassed Apple in market value, reaching $2.887 trillion compared to Apple’s $2.875 trillion, marking the first time Microsoft has been the world’s most valuable company since 2021. Apple’s shares have faced pressure due to concerns about iPhone demand, while Microsoft’s rise is attributed to its lead in generative artificial intelligence through an investment in OpenAI, driving a cloud-computing rebound. Both companies have relatively high price-to-earnings ratios compared to historical averages. 
• JP Morgan Chase’s Q4 results revealed a mixed performance. The asset and wealth management division saw a 7% increase in net income, reaching $1.217 billion, while the overall net income for the bank decreased by 15% to $9.307 billion. The decline was offset by a 12% increase in total revenue to $38.574 billion, driven by a robust investment banking pipeline. Despite a dip in net income, the bank’s financial health remains resilient with a steady Common Equity Tier 1 capital ratio of 15%. 
• Wells Fargo reported a Q4 net income of $3.45 billion, up from $3.16 billion the previous year. The adjusted earnings per share of $1.29 exceeded estimates. Despite the positive results, the equity fell 3.3% after the announcement. One-time items, including a special FDIC charge and severance costs, were considered in the results. The bank anticipates a cautious outlook, mentioning potential reductions in net interest income in the coming year. 
• Citigroup plans to cut 20,000 jobs over two years after a disappointing quarter resulting in a $1.8 billion loss. CEO Jane Fraser emphasized the importance of 2024 and the ongoing restructuring. The loss was driven by $3.8 billion in charges, including reorganization expenses and a $1.7 billion payment to replenish a government deposit insurance fund. 
• Bank of America’s Q4 2023 profit declined due to $3.7 billion in one-off charges and a drop in interest income as the bank paid more to retain customer deposits. Despite this, executives expressed optimism about the US economic outlook, highlighting resilience among consumers. The bank reported a net income of $3.1 billion, or 35 cents a share, compared to $7.1 billion, or 85 cents a share, a year earlier. 
• UnitedHealth’s shares fell 4% last Friday as Q4 2023 medical service costs exceeded expectations, driven by higher expenses related to RSV vaccines for older Americans and increased healthcare services amid rising COVID-19 cases. While the company beat profit and revenue estimates, the unexpected cost surge led to concerns, impacting other health insurers’ shares, including CVS Health and Humana. UnitedHealth reaffirmed its 2024 medical cost forecast but faced scepticism from analysts about potential increased spending trends. 
• BlackRock reported a robust Q4 2023, with revenues at $4.631 billion and net inflows of $96 billion. The firm’s total assets under management now exceed $10 trillion. An acquisition of Global Infrastructure Partners is expected to strengthen its infrastructure offerings. BlackRock also declared a dividend increase to $5.10 per share, highlighting confidence in its financial health. 
• Delta Air Lines has reduced its 2024 profit outlook to $6-$7 per share, citing higher costs and supply chain challenges. CEO Ed Bastian highlighted the impact of rising maintenance costs and ongoing supply chain constraints, expressing uncertainty about when maintenance efficiency will return to pre-pandemic levels. Meantime, the airline announced an order for up to 40 Airbus A350-1000 widebody aircraft, becoming the first US carrier to operate this model, emphasizing premium services, particularly in the Asia-Pacific region. Delta’s shares dropped 9% on Friday. 
• Burberry shares fell over 5.5% on Friday after the luxury fashion brand lowered its full-year adjusted operating profit guidance due to slowing luxury demand. Retail revenue dropped 7% to £706 million, and comparable store sales declined 4% in Q3. Burberry now expects adjusted operating profit for the fiscal year ending March 30 to be £410m to £460m, below previous guidance. Currency headwinds of approximately £120m to revenue and around £60m to adjusted operating profit are anticipated. 

• Citi analysts upgraded Qualcomm shares to Buy from Neutral, placing a 90-day positive catalyst watch and raising the price target to $160 from $110. The bank anticipates upside in Qualcomm’s earnings and guidance, citing inventory replenishment in the handset market and potential share gains at Samsung. Citi raised its revenue and EPS estimates for fiscal years 2024 and 2025. 
• Bain Capital and Hellman & Friedman are reportedly leading the race to acquire DocuSign, with a market valuation of around $12 billion. The private equity firms are in advanced negotiations for what could be one of the largest leveraged buyouts of 2024. Blackstone, initially in discussions, has withdrawn from the bidding process. A conclusion to the auction is expected in the coming weeks. The potential acquisition comes as DocuSign experiences a surge in interest, with strong financial performance recently reported. 
• This week’s focus in the US will be on retail sales, housing indicators, and Fed speeches. Earnings reports are expected from Morgan Stanley, Goldman Sachs, and others. Elsewhere, China takes the forefront, revealing critical data including Q4 GDP, while global economic health is gauged through UK and Canada’s inflation rates and retail sales. In Germany, attention turns to the ZEW Economic Sentiment index, while Japan discloses inflation figures. Additionally, ECB President Lagarde’s speeches will shape discussions within the Euro Area.