Q1 2022 Earnings Season kicked off this week, with many of the major banks and financial institutions reporting quarterly results. Read the top themes and commentary from an eventful opening week.
Geopolitical Implications Will Outlast the War Itself: “The overall direct financial impact from Russia and Ukraine related instruments on our first quarter revenues was a net loss of approximately $300 million. Our risk mitigation efforts would not have been possible without the close collaboration of our people around the globe on both the business and the control side of our firm… More broadly, the Russian invasion has further complicated the geopolitical landscape and created an additional level of uncertainty that I expect will outlast the war itself.”
Commodity Supply Shocks Sparking Further Inflation: “Our clients are trying to understand the implications of the rapidly changing investment environment. The Russian invasion of Ukraine marks a profound geopolitical shift that is accelerating a reassessment of global supply chains. It also creates a supply shock in commodities that is further increasing inflation. Even before the war, inflation was already top of mind for many investors as the effect of the pandemic, including the shift in consumer demand from services to capital goods, labor shortages and supply chain bottlenecks, broad inflation in the United States, in Canada and the United Kingdom, across European Union to the highest level in decades.”
Energy Outlook and Going Green: “In response to the energy shocks caused by the war in Ukraine, many countries around the world are reevaluating their energy dependencies and are looking for new sources of energy. This may mean increasing production of traditional energy sources in the near term. But I believe recent events will accelerate the shift towards greener sources of energy in many parts of the world over the long term, and we will see a tremendous changes in the energy transition. This presents a significant long-term opportunity for investments in infrastructure, renewable, clean tech on behalf of our clients.”
Balance Sheet Measures to Combat Russia-Associated Exposures: “We built $902 million in reserves driven by increasing the probability of downside risks due to high inflation in the war in Ukraine as well as builds for Russia-associated exposures in CIB and AWM.”
Sectors with Highest Exposure: “The Russian invasion of Ukraine and the sanctions it triggered unleashed an enormous supply shock on the world, further fueling inflation and placing global growth under considerable pressure. Back recently from seeing clients in Europe and the Middle East, it is security, energy, food, defense, cyber or operational resilience that has risen to the top of their strategic dialogue.”
Enforcement of Sanctions: “We started to carefully reduce our operations in and our exposures to Russia in January, and we benefited from being on the front foot here. We've been managing down our financial exposures, both in level and composition and there at a reasonable level, especially given the additional reserves we took during the quarter. We've also increased reserves for the second and third order impact of the war beyond Russia and Ukraine. And our intention to sell significant portions of our local business in Russia remains. We are in continuous communication with the U.S. government, and we continue to do our part to enforce the sanctions regime.”
De-Globalization Period: “In recent decades, we've grown used to low inflation, low interest rates and the free flow of people and goods across national borders. I believe we're in a period [where] that won't be the case and the consequences for financial markets will be meaningful.”
According to Goldman Sachs, Volatility = Risk. Risk Increases Trading Activity, but Diminishes Investment Banking and Underwriting: “As I noted, the evolving market backdrop had a significant effect on client activity. This meant that some parts of our firm faced significant headwinds like equity capital markets, where issuance volumes were lackluster for the quarter. On the other hand, Global Markets had a strong quarter, as this environment allowed us to support clients in the risk intermediation and financing needs.”
Goldman Sachs Trading: “We saw exceptional strength in both our FICC and Equities businesses… Segment net revenues were $7.9 billion in the quarter, up 4% year-on-year.”
Goldman Sachs Underwriting: “In equity underwriting, net revenues were $261 million, down significantly versus a record performance in the first quarter of 2021 on the lower industry issuance volumes that David mentioned.”
Morgan Stanley Trading: “Results of the first quarter illustrate resiliency and durability. Equity and fixed income supported our clients while navigating volatile markets… Equity revenues were $3.2 billion, reflecting broad-based strength in performance against the backdrop of volatile markets.”
Morgan Stanley Underwriting: “Equity underwriting revenues were $258 million, a meaningful decline from last year's elevated results in line with market volumes. Heightened volatility led clients to delay issuance activity.”
Citi Trading: “In our Markets business, our traders navigated a volatile environment quite well, aided by our mix with notable performance amongst corporate clients and strong gains in FX and commodities. This led to revenues almost equal to the very active first quarter of 2021.”
Citi Underwriting: “Investment Banking revenues were down 43% and driven by the contraction in capital markets activity, partially offset by growth in M&A.”
Mortgage Banking: “The increase in rates negatively impacted our mortgage banking business. The mortgage origination market experienced one of its largest quarterly declines that I can remember and it will take time for the industry to reduce excess capacity.”
Home Lending: “Home lending revenue declined 33% from a year ago and 19% from the fourth quarter, driven by lower mortgage originations and (inaudible) margins given the higher rate environment and competitive pricing in response to excess capacity in the industry.”
QUESTION: “Jamie, in the shareholder letter, you had spoken about how the market is underestimating the number of Fed hikes that might be needed to curb inflation. And what's your expectation around the level of Fed tightening?”
ANSWER: “Yes. So I think the implied curve now is like 2.5% at the end of the year and maybe 3% at the end of 2023. And look, no one knows. And obviously, everyone does their forecast. I think it's going to be more than that, okay? I give you a million different reasons why because of inflation and just about deposits. And we've never been through ever QT like this. So this is a new thing for the world and I think is more substantially important than other people think because the huge change of flows of funds is going to create as people change their investment portfolio.
BLK Sees its ETFs as a Shelter From Market Volatility: “The diversity of our ETF franchise enables us to generate durable, industry-leading organic revenue growth in varying macroeconomic environments. For example, as inflation expectations persisted, investors turn to our commodity ETFs, where we are now the clear category leader, and as Larry will highlight, our bond ETFs gathered net inflows in one of the most challenging quarters for fixed income in recent history.”
$114 Billion in Net Flows Amid Market Turmoil: “I believe our relationships with clients have never been stronger. Our clients appreciate our voice and our consistent advocacy for long-term investing on their behalf. Our first quarter's result demonstrates these strengths. BlackRock generated $114 billion in net long-term inflows in the first quarter, demonstrating the breadth of our asset management platform and positive flows across all product types, all investment styles in all regions.”
BlackRock Sees Rising Rates as a Tailwind: “I would say rising rates is an opportunity, not a problem… [We are] helping our clients navigate how they should think about duration and how they should think about inflation, how they can create a return that's above long-term inflation rates.”
Playing Offense: “I have found that often, in times of market uncertainty, BlackRock's breadth and resilience enables us to play offense when others may be pulling back. Our agility in responding to opportunities and continued investments across market cycles have driven our industry-leading growth, our consistent growth and generated value for our shareholders.”
Bed Bath & Beyond Struggles to Compete for its Customers’ Dollars: “Our business has been impacted by extraordinary macroeconomic factors, such as the derailing of the global supply chain, continued disruption from the Omicron variant, unprecedented inflation, rising interest rates and a turbulent geopolitical landscape, which have also weighed on consumer confidence.”
Supply Chain Challenges at the Heart of BBBY’s Struggles: “The core issues remain embedded in pervasive supply chain challenges, which led to fourth quarter comparable sales of minus 12% and adjusted gross margins of 28.8%. Specifically, the lack of available inventory, which impacted us last quarter has proved to be a continuing impediment.”
CarMax’s Used Car Business Facing Consumer Confidence Challenges: “Consumer confidence was obviously one of the factors [of the deceleration in the used car business from fiscal Q3 to fiscal Q4]... From an affordability standpoint, you've got interest rates going up. Inflation, you've got the Ukraine-Russia war. There's just a lot weighing on the consumer right now.”
Longer-Term Loans for Used Car Purchases: “People are taking longer terms out there. Right now, you see a much higher prevalence of used car loans higher than 72 months… So I think that affects the penetration and are clear impacts of affordability for the customer.”
For Rent The Runway, Inflation Justifies Renting Over Buying as Prices Continue to Climb: “Inflation for us is a competitive advantage because it actually increases the value that the subscriber is getting from Rent the Runway. So even prior to inflation, she's paying about $140 a month and receiving 20x the value. She's getting $4,000 worth of designer product. And as cost of products are going up, she's seeing even more value, which is why we've seen higher geographic diversity in our sub base, higher age diversity, and we anticipate that continuing.”
QUESTION: “You're the Chief Worry Officer. You're the Chief Risk Manager. You're bringing up all the things that keep you up at night, which is great. But you can read it one way and say, "Hey, Jamie and JPMorgan think there's going to be a recession this year." And you can read it in another way, saying, "Hey, things are fine, but these are some tail risks." You have a lot of people, a lot of resources. Do you think the U.S. is going to have a recession this year based on everything you know?”
ANSWER: “I don't… First of all, I can't forecast the future any more than anyone else. And the Fed forecasted and everyone forecasted, and everyone's wrong all the time, and I think it's a mistake… We know the weather is going to change and all that stuff like that. But I have pointed out in my letter [that there is] very strong underlying growth right now, which will go on. It's not stoppable. The consumer has money. They pay down credit card debt. Confidence isn't high, but the fact that they have money, they're spending their money. They have $2 trillion still in their savings and checking accounts. Businesses are in good shape. Home prices were up. Credit is extraordinarily good.”
Wells Fargo: “March was the eighth straight month in which inflation outpaced income with lower income consumers being most impacted by rising energy and food prices. That said, higher deposit balances and rising wages have thus far allowed consumers to weather these headwinds… As we sit here today, our internal indicators continue to point towards the strength of our customers' financial position but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risk to the downside. Wells Fargo is positioned well to provide support for our clients in a slowing economy.”
Ally: “We continue monitoring broader market indicators of consumer health, including wage and price inflation, employment conditions and overall payment trends. While the current inflationary environment will add some pressure to households, consumers are generally well positioned with healthy balance sheets.”
Citi: “The macro outlook for the rest of the year can only be described as complex and uncertain. And while my job is to prepare for all outcomes, our view is that strong nominal income growth and continuing momentum in the labor market will help support near-term growth in the U.S. economy in the face of inflationary pressures. But we expect material regional differences in the impact with economic growth in the individual consumer and businesses in Europe hit hardest.”
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