Bank Analysts Hear from Top 4 U.S. Institutions

Earnings season kicked off last week, with the top four U.S. banks meeting with analysts. The Financial Brand combed through transcripts from those calls to tease out what analysts were probing and what leaders were highlighting. Citigroup was in an orbit of its own, with a major restructuring of the bank underway. But four common themes for 2024 were evident across multiple institutions.

1. Realism about AI at JPMorgan Chase and BofA

Analysts asked the two largest U.S. banks for the latest on their plans for artificial intelligence.

During the earnings briefing, Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, asked Jeremy Barnum, JPMorgan Chase CFO, about the latest on the company’s push into artificial intelligence.

Some background, before getting to Barnum’s answer: During the JPMorgan Chase investor day in May 2023 a major program in AI development was discussed, including plans for adoption in risk management, fraud prevention, marketing, customer experience and other areas. Both traditional AI and generative AI came under this plan. Deployment was already underway in multiple areas. In June 2023, the bank appointed Teresa Heitsenrether, a Chase veteran, to be chief data and analytics officer, and to head up the companywide AI effort.

In response to Mayo, Barnum said that the bank’s AI program is “a little bit ‘barbelled.'”

“On the one hand, we’re very excited by this,” he said. “There’s clearly some very significant opportunities, starting with technology developers themselves, in terms of the opportunity for significantly increased productivity there.”

At the other end of the “barbell”: “We’re JPMorgan Chase. We’re not going to be chasing shiny objects here in AI. We want to do this in an extremely disciplined way. It’s very commercial and very linked to tangible outcomes. And so the current focus is on making sure we have a contained, well-chosen list of high-impact use cases and that we’re throwing resources at those in the right way that’s extremely pragmatic and disciplined.”

Bank of America’s Brian Moynihan, CEO, was questioned about AI adoption by both Mayo and Gerard Cassidy, managing director, head of U.S. bank equity strategy and large cap bank analyst, at RBC Capital Markets.

Cassidy asked Moynihan which technology AI most resembled — in terms of its likely impact on banking — digitization or the blockchain.

Moynihan favored the first, seeing AI as extremely significant. The BofA chief pointed to the bank’s virtual assistant technology, Erica, as a success story for AI. Development began a decade ago, he said, but it has been paying off by displacing much activity from other channels that are staffed by humans. In the fourth quarter of 2023 alone, Erica had 170 million interactions with consumers. The Erica technology has been brought over to the bank’s commercial side as part of its CashPro service, as “CashPro Chat.”

Moynihan said that as AI deployment picks up at BofA it will help the company rationalize its staffing. He said that the bank had to hire people quickly after the “great resignation” of 2021-2022. He said hiring could be throttled down, and employees redeployed as successful use cases for AI prove out.

“We think there’s vast promise for AI and we’re deploying it on a lot of internal stuff. It helps employees work better and work faster. We just have to make sure it does a great job for the customer.”

— Brian Moynihan, Bank of America

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2. How is the American consumer doing?

One of the top concerns among analysts was whether the Federal Reserve will really engineer a “soft landing” as it cuts back interest rates during 2024. A related question was how the American consumer is doing in that context.

“The way we see it, the consumer is fine,” said Barnum of JPMorgan Chase. “All of the relevant metrics are now effectively normalized.” This implies that people will behave more as they did in the pre-pandemic economy. The “cash buffers” of pandemic era savings accounts have gone away, said Barnum, but that doesn’t seem to have impacted consumer spending.

“Consumers have been spending more than they’re taking in,” said Barnum. He credits this to a relatively strong labor market, which he said leads to strong consumer performance.

“So that’s how we see the world,” said Barnum.

Bank of America’s Moynihan said that consumer spending should sustain the economy, although at a lower growth rate than was seen through the third quarter of 2023.

“We see consumer activity indicating that they’re still in the game,” said Moynihan. “They’re still spending where they usually spend.” He said the bank has seen a shift towards more spending on restaurants and experiences and less spending on retail goods.

“Much is made about there being higher credit card balances,” said Moynihan. “But people are forgetting that the economy is bigger than it was in 2019 because of inflation.”

But that’s not how all of the major bankers see things.

Wage growth over the last couple of years paints an attractive picture, said Mike Santomassimo, CFO at Wells Fargo, but it’s not the whole landscape.

“The further down you go in income levels, the cumulative impact of inflation has really taken a toll. So you’re going to have some percentage of people who are feeling much more stressed than the aggregate numbers would imply.”

— Mike Santomassimo, Wells Fargo

“And in some cases,” he added, “their liquidity is going to be lower than it was pre-Covid.”

As a result, some of these consumers have been running up higher credit card balances than other consumers, said Santomassimo. This is driving increased credit card losses at the banks, though the general view during the earnings briefings is that this is a “normalization” back to more typical behavior.

“We’re not seeing anything that goes beyond that at this point,” said Charlie Scharf, Wells Fargo CEO.

Lenders point out that the “sweet spot” they offer credit cards and other consumer credit to generally has higher FICO scores. Whether this will continue to help remains to be seen. A bit of context: Large banks have been talking about the approach of “normalization” for over a year.

Read more banking trends from recent earnings briefings:

3. Credit card growth trend is key driver for Big Banks

What makes the outlook for cards so important is that right now it is one of the main sources of loan growth for larger institutions. Speakers from the four banks making their earnings announcements generally indicated that other loan categories were not increasing significantly.

“Credit card loans continued to grow, while most other categories declined,” Wells’ Mike Santomassimo said. Credit card spending among Wells customers was up 15% over the year-earlier period at the end of the fourth quarter. The bank also saw new card accounts grow by 17% in 2023, in part due to new co-branded card programs it introduced. Wells card balances are up 40% since the end of 2021.

At JPMorgan Chase, “we expect strong loan growth in cards to continue, but not at the same pace as 2023,” according to Barnum. Outside of cards, he said, “loan growth will likely remain muted.” Overall, the bank expects loan balances to be “modestly down” in 2024.

At Citibank, cards are growing more important than ever, as cards and U.S. retail banking are among the five major types of banking activity that the company will rely on in the wake of its continuing reorganization and trimming of business lines and geographies.

Stock analysts’ eyes are on more than credit card lending, of course. A key focus given post-pandemic employment trends, for example, is commercial real estate credit.

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4. Watching deposit trends as the Fed contemplates rate cuts

Generally, the bankers told analysts that they are following the expectations of the forward rate curve, and are anticipating that there will be as many as six interest rate cuts by the Federal Reserve over the course of 2024.

Chase’s Jeremy Barnum said that the bank expects that internal migration of deposits out of checking and savings and into CDs will continue, on the consumer side. On the wholesale deposit side, migration out of noninterest-bearing accounts into interest-bearing accounts will continue for some time, even as rates begin to decline. Total deposit balances will decline modestly at JPMorgan Chase over 2024, he said. Tempering that will be continuing growth from the company’s aggressive branch expansion, which will continue. Barnum said that the company opened 166 new branches in 2023 and plans to open a similar number of locations in 2024.

BofA’s Moynihan said that his organization’s branch expansion, while not as ambitious in numbers as Chase, has helped to drive more new deposit accounts. He also credited the bank’s digital platforms. He noted that the fourth quarter of 2023 marked the twentieth straight quarter of net additions to the bank’s checking account base. This is especially significant, he said, because they beget other business. He said the bank opened 600,000 net new consumer checking accounts in 2023.

“From the total of new checking accounts we opened just in 2023, those customers have opened nearly half a million credit card accounts with us,” said Moynihan. “On average, historically, we’ve seen those customers more than double their card balances within a year.”

Citi’s Mammoth Staff Cutback and Simplification

Citigroup had a bad final quarter in 2023 — a new loss of $1.8 billion — and Jane Fraser, CEO, devoted much of her earnings presentation to an update on the company’s new strategic blueprint. This entails restructuring the company around five business lines and divesting operations that don’t fit that plan. Much of this was going on in 2023.

“Given how far we are down the path of our simplification and divestitures, 2024 will be a turning point as we will be able to completely focus on the performance of our five businesses and our transformation.”

— Jane Fraser, Citigroup

Analyst Mike Mayo hit Fraser with a long question that boiled down to this: Citi has been through numerous restructurings and apparently all failed: “Why is this time different?”

“Look, it’s not lost on me that there have been many attempts in the past to change this firm,” said Fraser, who succeeded CEO Michael Corbat in early 2021. “I and the management are fully committed to transforming this company for the long term, and we are addressing the issues that have held us back in the past.” Much of the execution that will determine how well the effort goes will occur in 2024, Fraser said.

A key part of the Citi plan is cutting out layers of management, described as an effort to get clients closer to decision makers and to reduce bureaucracy. The first wave of that will be done by the end of the first quarter of 2024, according to Fraser, and will mean the elimination of 5,000 positions, mostly managerial slots. Over the medium term, as efforts to simplify structure, “rightsize” functions, and improve productivity, Fraser expects to chop out 15,000 additional positions.

“I don’t love thinking about headcount,” Fraser told the analyst. “I think about expenses. I think it’s a more meaningful number.”