Earnings Season Recap #9

The Q4 earnings season is just getting started. Last Friday kicked us off with Bank of America, JPMorgan Chase, Citigroup, and BlackRock, to name a few.

Q4 2022 Y/Y Δ
Revenue +43%
EBIT +78%
margin 52% (42)
Net income +78%
margin 47% (38)
EPS +78%

-> Large investments despite the market downturn: Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As I have stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support customers' structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile. In 2022, we spent $36.3 billion to capture the structural demand and support our customers' growth. In 2023, our capital budget is expected to be between $32 billion and $36 billion. Out of the $32 billion to $36 billion CapEx for 2023, about 70% will be allocated for advanced process technologies. About 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging mass making and others. – 00:12:22 C.C. Wei, Chief Executive Officer

-> Lowering costs due to economies of scale: Our 28-nanometer and below overseas capacity could be 20% or more of our total 20 and below capacity in five years or more time. While the initial cost of overseas fab is higher than TSMC in Taiwan, our goal is to manage and minimize the cost gap. [...] At the same time, we are leveraging our competitive advantage of blast volume, economies of scale, and manufacturing technology leadership to continuously drive cost down. [...] By taking such actions, TSMC has the ability to absorb the higher cost of overseas fabs, while remaining the most efficient and cost-effective manufacturer, no matter where we operate. Even if we increased our capacity outside of Taiwan, we believe long-term gross margins of 53% and higher continue to be achievable, and we can earn a sustainable inherent ROE of greater than 25% while delivering profitable growth for our shareholders. – 00:25:48 Wendell Huang, VP & CFO

-> End market for PCs and smartphones is dropping: Most of the business for TSMC in the last two years is from the PC and the smartphone, and, let me say, that inventory correct happened to be the most severe one. The end market dropped more severely than we thought. In fact, the unit will not increase, but the content will be increased. So, its demand is more softened than we thought three months ago. Why be repeated at N5 or N3? Cyclicality of the semiconductor always exists, but it's unlikely this time the scenario was to be repeated because our current down term actually is kind of being enhanced or being degraded by the pandemic. Due to the pandemic, the digital transformation progress has been enhanced. And so, the demand being increased dramatically. But then due to the pandemic, the supply chain disruption happened. People, during this time, probably changed their strategy or their thoughts on the inventory buildup. Artificially, the inventory has been built up quickly and dramatically. – 00:41:29 C.C. Wei, Chief Executive Officer

-> TSMC expects to keep widening its gap toward competitors: When you look at 2023, actually, we look at the smartphone and PC units. We think it's a little bit drop in terms of units, and the content will continue to increase. For TSMC, actually, we increased our product portfolio. We also extend our available market segment to TSMC, so that's why we expect the whole industry to drop slightly and TSMC still grow slightly. – 01:01:22 C.C. Wei, Chief Executive Officer

Q4 2022 Y/Y Δ
AUM -14%
Revenue -15%
EBIT -30%
*margin 32.9% (39.9)
EPS -22%

-> The most challenging market in over 50 years: Throughout BlackRock's history, we have consistently invested in our business with a long-term focus and commitment to serving clients across market environments. We have established leadership positions in high-growth areas, such as ETFs, private markets, outsourced solutions and technology. And we have integrated these industry-leading capabilities into our One BlackRock business model and culture to create a distinct and differentiated value proposition for clients. As a result of these investments, we grew organically at our fastest rate ever in 2021. And while 2022 was one of the most challenging market environments in over 50 years, clients around the world once again turned to BlackRock for advice and assistance to construct more resilient portfolios. In good times and bad times, whether adding or reducing risk, our continued industry-leading organic growth demonstrates that clients are increasingly consolidating more of their portfolios with BlackRock for long-term solutions that solve their most challenging investment needs and address their unique risk preferences and priorities. – 00:01:28 Gary Shedlin, Chief Financial Officer

-> $1.8 trillion in 5 years: We ended the year with very strong momentum with $114 billion of fourth quarter net inflows, representing 3% annualized organic growth base fees. We estimate that BlackRock captured over 1/3 of the long-term industry flows in 2022, leading the industry and delivering positive organic base fees for the year. Over the past 5 years alone, BlackRock has delivered an aggregate $1.8 trillion in net inflows or 5% average organic asset growth compared to flat or negative industry flows. Over this 5-year period of time have been both rallies and contractions, but BlackRock has always delivered growth, reflecting the power of our connectivity to our clients, our fiduciary standards and our diversified platform. – 00:19:18 Gary Shedlin, Chief Financial Officer

-> A very complex market environment: 2022 was a year of transition and a complex market environment for every one of our clients. We witnessed transformation in the geopolitical world order that rewired globalization and supply chains, upending assumptions about inflation and drove the normalization and eventually tightening of monetary policy. Production constraints, labor shortages and energy and food price disruptions and price increases followed the Russian invasion of Ukraine, causing inflation to hit a 40-year high, sparking a cycle of rate hikes by central banks. Inflation continues to be a top concern despite recent cooling we saw at the end of this year - in the beginning of this year. – 00:21:08 Larry Fink, Chairman & CEO

-> Eroded hope and reinforced pessimism: Global growth continues to slow. The challenges society has experienced, not just in the past year, but since the pandemic, has eroded hope and reinforced pessimism in many parts of the world. We've seen a decline in birth rates, an increase in aging populations, a rise in nationalism and populism. And I fear that we are entering a period of economic malaise. To correct this, the role of business becomes even more critical than ever. Leaders must continue to invest in technology and research and development to improve long-term prospects and to provide a vision that offers hope about the future. Fundamentally, investing is also an act of hope, hope that the future will be better than the present. If people do not have hope, they will not take money out of a bank account and invest it in a 30-year retirement outcome. – 00:22:10  Larry Fink, Chairman & CEO

-> Long-term > short-term: Today, the financial narrative is so often about the near-term market moves, the topic of the day, like the latest meme stock or media headlines about political polarization. Throughout our history, BlackRock has taken a long-term approach to investing. It is BlackRock's role to show people the benefits of investing for the long term. to give them hope that, over time, their returns with a balanced portfolio can deliver long-term financial security. Against the current backdrop, BlackRock has an even greater obligation to help our clients wade through the uncertainty and give them the confidence to invest in the long term. – 00:23:04  Larry Fink, Chairman & CEO

Q4 2022 Y/Y Δ
Revenue +18%
Net income +5.9%
*margin 32% (35)
EPS +7.2%
ROTCE 20% (19)

-> Expects a mild recession and resuming buybacks: The net reserve build of $1.4 billion was driven by updates to the firm's macroeconomic outlook, which now reflects a mild recession in the central case as well as loan growth in card services, partially offset by a reduction in pandemic-related uncertainty. [...] The firm reported net income of $37.7 billion, EPS of $12.09 and record revenue of $132.3 billion, and we delivered an ROTCE of 18%. On the balance sheet and capital on Page 4, we ended the quarter with a CET1 ratio of 13.2%, up 70 basis points, primarily driven by the benefit of net income, including the sale of Visa B shares less distributions, AOCI gains and lower RWA. RWA declined approximately $20 billion quarter-on-quarter, reflecting lower RWA in the Markets business, which was partially offset by an increase in lending, primarily in card services. Recall that we had a 13% CET1 target for the first quarter of 2023, which we have now reached 1 quarter early. So given that, we expect to resume share repurchases this quarter. – 00:02:14 Jeremy Barnum, CFO

-> Health of the U.S. consumers and small businesses: Starting with a quick update on the health of U.S. consumers and small businesses based on our data. They are generally on solid footing, although sentiment for both reflects recessionary concerns not yet fully reflected in our data. Combined debit and credit spend is up 9% year-on-year. Both discretionary and nondiscretionary spend are up year-on-year, the strongest growth in discretionary being travel. Retail spend is up 4% on the back of a particularly strong fourth quarter last year. E-commerce spend was up 7%, while in-person spend was roughly flat. Cash buffers for both consumers and small businesses continue to slowly normalize, with lower income segments and smaller businesses normalizing faster. Consumer cash buffers for the lower income segments are expected to be back to pre-pandemic levels by the third quarter of this year. – 00:03:39 Jeremy Barnum, CFO

-> Investment Banking is badly hurt: CIB reported net income of $3.3 billion on revenue of $10.5 billion for the fourth quarter. Investment Banking revenue of $1.4 billion was down 57% year-on-year. IB fees were down 58%, in line with the market. In Advisory, fees were down 53%, reflecting lower announced activity earlier in the year. Our underwriting businesses were affected by market conditions, resulting in fees down 58% for debt and down 69% for equity. In terms of the outlook, the dynamics remain the same. Pipeline is relatively robust, but conversion is very sensitive to market conditions and sentiment about the economic outlook. Also note that it will be a difficult comparison against last year's first quarter. – 00:07:15 Jeremy Barnum, CFO

-> Assumes rate cuts later in the year: Going through the drivers, the outlook assumes that rates follow the forward curve. The combination of the annualization of the hike in late December, the hikes expected early in the year and the cuts expected later in the year should be a net tailwind. Offsetting that tailwind is the impact of deposit repricing, which includes our best guess of rate paid in both wholesale and consumers. In addition, looking at balance sheet growth and mix, we expect solid overall Card spend growth as well as further normalization of revolving balances per account and modest loan growth across the rest of the company. We expect that this tailwind will be offset by lower deposit balances given modest attrition in both consumer and wholesale. But it's very important to note that this NII outlook is particularly uncertain. Specifically, Fed funds could deviate from forwards, balance attrition and migration assumptions could be meaningfully different, and deposit product and pricing decisions will be determined by customer behavior and competitive dynamics as we focus on maintaining and growing primary bank relationships and may be quite different from what this outlook assumes. – 00:12:06 Jeremy Barnum, CFO

-> Expects inflows into money market funds: I just want to give a big picture about why I do not consider $74 billion [NII ex Markets] conservative. So the Federal Reserve reduced its balance sheet by $400 billion. $1.5 trillion came out of bank deposits. And so investors can invest in e-bills, money market funds. And of course, banks are competing for the cap of money now. And banks are all in different places. So some banks started competing heavily. Some have a lot of excess cash and maybe compete less. But if you look at prior -- and forget what happened in 2016. I think people make a huge mistake looking at that. We've never queued -- these 0 rates. We've never had rates go up this fast. So I expect there will be more migration to CD, more migration to money market funds. A lot of people are competing for it, and we're going to have to change saving rates. Now we can do it at our own pace and look at what other people are doing. We don't know the timing, but it will happen. – 00:23:06 Jamie Dimon, Chairman & CEO

-> Investment Banking outlook: So I think the thing that's interesting about banking right now is that the declines have been so significant, obviously, from very elevated levels. But even relative to just 2019, 2022 was a relatively weak year. And as we look into 2023, it's possible that the actual economic environment will be worse than it was in [2022]. That could conceivably make you pessimistic about the Investment Banking wallet outlook. And to be sure, it's not as if we're super optimistic. But it's important to note that part of the issue here is how quickly things change in 2022, specifically with respect to rates as that affects the debt business and valuations as it affects M&A and DCM as well. And one of the sort of necessary conditions for people to do deals or decide to raise capital is just getting comfortable with valuations in the open market. So I think there's a chance that, that actually winds up helping in 2023 in the Investment Banking world. Of course, we don't know. But those are some of the things that we're thinking about. – 00:50:59 Jeremy Barnum, CFO

-> Dimon on the yield curve: Yes, we do. But we should really get the answer, of course, to get that. We look at what everybody is doing, pension plans, governments. We look at every part of the curve. We look at what other banks are doing. I think I mentioned earlier in this call, banks are in different positions. Some may have to sell securities to finance their loan books. We obviously don't. So people are in a different position. And as Jeremy pointed out, it's very important. That yield curve will not be the same 6 months from now than it is today. While we use that to kind of look forward, it's not actually our forecast. We know it will be wrong. And with the investment portfolio, we'd be invested where there are opportunities. We bought a lot of Ginnie Maes when there was a 60 OAS spread. We sold -- one of the reasons we take securities losses, that gives you $10-plus billion you can reinvest when you think of more attractive securities. – 00:57:37 Jamie Dimon, Chairman & CEO

Q4 2022 Y/Y Δ
Revenue +11%
EBIT +1.3%
*margin 32% (35)
Net income +1.4%
*margin 29% (32)
EPS +3.7%

-> Asset quality of customers remains healthy: First, it is an intellectible truth that our asset quality of our customers remains very healthy. On the other hand, it’s impossible to gainsay that the net charge-offs are moving to pre-pandemic levels. So, in the fourth quarter, we saw net charge-offs of $689 million, an increase of $169 million from quarter three. The increase was driven by both higher commercial and credit card losses. As these charts show, they’re still very low in the overall context. In commercial, we had a few of older company-specific loans, but not related, not predictive of any broader trends in the portfolio. These were already reserved for in prior periods and based on our methodologies, went through charge-off in quarter four. Credit card charge-offs increased in quarter four as a result of the flow-through of modest increase in last quarter’s late-stage delinquencies. This should continue as we transition off the historic lows and delinquencies to still very low pre-pandemic levels. – 00:13:57 Brian Moynihan, CEO

-> Mild recession as a base scenario: So, let’s just stop on the reserve setting scenario. Our scenario contemplates a mild recession. That’s the base case of the economic assumptions in the blue chip and other methods we use. But we also add to that a downside scenario. And what this results in is 95% of our reserve methodologies weighted towards a recessionary environment in 2023. That includes higher expectations of inflation leading to depressed GDP and higher unemployment expectations. This scenario is more conservative than last quarter's scenario. Now to be clear, just to give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment to peak at 5.5% early this year in 2023 and remain at 5% or above all the way through the end of ‘24, obviously, much more conservative than the economic estimates that are out there. – 00:15:10 Brian Moynihan, CEO

-> Comments on consumer behavior: So before I move it to Alastair, I want to just update a few comments on our consumer behavior. Consumer deposit balances continue to show strong liquidity with the lower cohorts of our consumers continuing to hold several multiples of balance that they have as a pandemic began. These balances are drifting down, but they still have plenty of cushion left. While their spending remains healthy, we continue to see the pace of that year-over-year growth slow. In the aggregate, in 2022, our consumer spent $4.2 trillion, which outpaced 2021 by 10%. You can see that on slide 35. Two things to note on that consumer spending pace. There continues to be a slowdown. Year-over-year growth percentage earlier this -- earlier in 2022 was 14% year-over-year. They’ve now moved to 5% year-over-year in the fourth quarter. So, what does this mean, with that level of growth in year-over-year spending is consistent with the low inflation, 2% growth economy we saw pre-pandemic. They’re also moving from goods to service and experience and spend more money on travel vacations and eating out and things like that. That is good for unemployment, but continues to maintain service side inflation pressure.
– 00:18:09 Brian Moynihan, CEO

Uncertainty being the catalyst for no full-year guidance: But as it relates to the forecast, look, we feel like the modest balance declines are kind of in there that may continue. And this continued rotation from some of the noninterest-bearing to interest-bearing. We got some pricing and rate pressure. So, that’s in the back of our mind, too. And the only final thing I’ll just say is, we’re reluctant to go a whole lot further out. Last year, we declined to give a full year guide. This year, we feel that way in particular because it’s just a much more sensitive environment when we’re modeling when interest rates are at 5% than when they were at 50 basis points. So, for all those reasons. Now, I will say this, that’s the final point. We just got -- I think we got to stay patient because we got to see how rates and balances and rotation shake out. And as rates return to more normal and as customer behavior and you can sort of see it, it’s behaving and maybe a little more normally than we should be able to resume our upward path over time. But we’ve got to see how this shakes out, and that’s why we don’t want to go out beyond Q1 at this stage.
– 00:43:21 Alastair Borthwick, CFO

-> Consumers “should be careful: So, I think you put it together, then you have in the securities-based business, customers took down leverage, paid off a fair amount of loans in the wealth management business, even though they’ve grown, I think, for 50 some quarters in a row now or something like that in loan balances, it happens, mortgages, obviously, are low. So -- but what we think is as the rate environment settles in, you’ll see that normalize and that we’ll get -- we’ll be back on the mid-single digits. We just won’t have the 10% loan growth year-over-year because that is faster in the economy and faster we do. We have not changed credit underwriting standards. And you can see that in the consistency of the origination standards back in pages of the appendix where we show sort of our cars and home equity and things like that. It’s just the demand side is a little soft because people are reading the same headlines we’re all reading about recessions coming, and what should -- they should be careful. – 01:12:14 Brian Moynihan, CEO

Q4 2022 Y/Y Δ
Revenue -5.7%
Net income -50%
*margin 15% (28)
EPS -51%
ROE 6.4% (12.8)
ROTCE 7.6 (15.3)

-> Starting to see macro-related impact on consumers: The Federal Reserve has made clear that reducing inflation is its priority and it will continue to take actions necessary to achieve its goal. We are starting to see the impact on consumer spend, credit, housing and demands for goods and services, but at this point, the impact of consumers and businesses has been manageable. And though there will certainly be some industries and segments of consumers that are more impacted than others, the rate of impact we see in our customer base is not materially -- I'm sorry, the rate of impact we see in our customer base is not materially accelerating. This plus the strength with which consumers and businesses went into this slowing economy is a helpful set of facts as we look forward. Our customers have remained resilient with deposit balances, consumer spending and credit quality still stronger than pre-pandemic levels. As we look forward, we're carefully watching the impact of higher rates on our customers and expect to see deposit balances and credit quality continue to return toward pre-pandemic levels. While we're not predicting a severe downturn, we must be prepared for one, and we are a stronger company than 1 and 2 years ago. – 00:09:23 Charles Scharf, President, CEO & Director

-> Signs of weakness within commercial real estate: Turning to the commercial real estate office portfolio. The office market is showing signs of weakness due to weak demand driving higher vacancy rates and deteriorating operating performance as well as challenging economic and capital market conditions. While we haven't seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both, outstanding balances and [indiscernible] down compared to a year ago. On Slide 8, we highlight loans and deposits. – 00:15:28 Michael Santomassimo, Senior EVP & CFO

-> Performance of the different banking segments: Growth in middle market banking was driven by larger clients, including both, new and existing relationships, which more than offset declines from our smaller customers. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 22% from a year ago driven by stronger treasury management results due to the impact of higher interest rates as well as improved lending results. Investment banking fees declined from a year ago, reflecting lower market activity with declines across all products and industries. Commercial real estate revenue grew 16% from a year ago driven by stronger lending results to a higher loan balances and the impact of higher interest rates. Markets revenues increased 17% from a year ago, driven by higher trading revenue in equities, rates and commodities, foreign exchange and municipal products. Average loans grew 10% from a year ago after growing for seventh consecutive quarter, average loans declined from the third quarter as utilization rates stabilized across most portfolios. On Slide 15, Wealth and Investment Management revenue was up 1% compared to a year ago, as the increase in net interest income driven by the impact of higher rates was partially offset by lower asset-based fees due to the decrease in market valuations. – 00:24:12 Michael Santomassimo, Senior EVP & CFO

-> Expects increased expenses, partly due to inflationary pressure: However, revenue-related expenses were lower than expected by market conditions. So we believe a good starting point for discussion for -- of 2023 expenses was $50.3 billion, which excludes operating losses. We expect expenses in 2023 to increase by approximately $1 billion due to both inflationary pressures and an approximately $250 million increase in FDIC expense related to the previously announced surcharge. These increases are expected to be partially offset by approximately $100 million of lower revenue-related expense, primarily driven by decreases in [ loan ] lending. Based on current market levels, we expect revenue-related expense in Wealth and Investment Management for 2023 to be similar to 2022. We've successfully delivered on our commitment of approximately $7.5 billion of gross expense saves over the past 2 years and through our efficiency initiatives, we expect to realize an additional $3.2 billion of gross expense reductions in 2023. A piece of this is related to the announcement we made earlier this week to create a more focused home lending business but expense savings from reducing our servicing business will take more time to be realized. We highlighted on this slide the largest opportunities for additional savings this year, and we believe we'll have more opportunities beyond 2023. Similar to prior years, the resources needed to address our risk and control work separate from our efficiency initiatives. – 00:28:17 Michael Santomassimo, Senior EVP & CFO

-> Comments on buybacks: What we've said is that we haven't been buying stock back. We anticipate we're going to begin buying it back. As we think about how much we have available in that capacity, what Mike said was our CET1 went up to 10.6%. Our required minimum buffers are at 9.2%. And we -- it said that we'll manage 100 basis points above the 9.2% plus or minus. So we do have substantial capacity but the ongoing earnings capacity of the company. And so that is -- that's -- our framework is to target a reasonable CET1 ratio if in the future to raise the levels of capital because of Basel III in-game or whatnot. We've got the earnings capacity to be able to do that, but we do have the flexibility. And now that we've got resolution with CFPB and things like that, to be able to go buy stock back. And we'll be making that decision based upon our views on the value of the stock and the liquidity in the market and things like that. But as we said, we do anticipate we'll be back in -- as opposed to where we've been. – 00:51:27 Charles Scharf, President, CEO & Director

Q4 2022 Y/Y Δ
Revenue +6%
Net income -21%
*margin 14% (19)
EPS -21%
ROTCE 5.8% (7.4)

-> The macro environment is better than expected: The global macro environment played out largely as we anticipated during the second half of last year. As we enter 2023, environments have had better than we all expected for the time being at least, despite the aggressive tightening by the Central Bank. In Europe, a warmer December reduced the stress on energy supplies and inflation is beginning to ease off its peak. That said, we still expect softening of economic conditions across the Eurozone this year given some of the structural challenges it is grappling with. In Asia, while the public health impact in China are unfortunately likely to be severe, the abrupt end of COVID-Zero should begin to drive growth and improve sentiment generally. And here at home, the labor market remains strong and holiday spending was better than expected, in part because consumers have been dipping into their savings. The Fed remains resolute in tackling core inflation, however, and therefore, we continue to see the U.S. entering into a mild recession in the second half of the year. – 00:01:13 Jane Fraser, Chief Executive Officer

-> Investment banking down 60%: With the wallet down significantly, our investment banking revenues were off by about 60% this quarter. While the pipeline looks more promising and the client sentiment is improving, it would be hard to precisely predict when the tide will turn in '23. Wealth Management's performance was disappointing. Revenues were down 6% in the quarter, with the macro environment creating headwinds in investment fees and AUM globally, but most acutely in Asia. However, we have been steadily improving the business as demonstrated by continued momentum in client acquisitions across the spectrum and net new investment flows. Similarly, we continue to build our client adviser base, albeit at a slower pace given this environment. We would expect to see these investments pay off as the markets recover. – 00:04:38 Jane Fraser, Chief Executive Officer

-> Continued weakness for IB?: I don't anticipate this, but you could have continued pressure in investment banking, but you could also have continued volatility in rates or currencies, and that could mean more upside than flat for the markets business. So there are a lot of puts and takes that one can scenario. I think what's really important is that we have a diversified portfolio of businesses that have strategic connectivity to them. And so what that allows for is that as the environment shifts in some way that we may not have predicted that we were often able to still drive significant performance as we did this year. – 01:19:00 Mark Mason, Chief Financial Officer

-> An unusual market: Also this is such an unusual market in the sense that you've got such strong labor market, driven by, frankly, supply shortage over as much as demand. And we've also got the consumers with still very high savings that they're dipping into, and we're seeing a bit more of the movements happening at the bottom end of all of this -- but this is not going to be like a normal recession, it will be about the manageability and the mildness of that likely if we do have one. – 01:09:27 Jane Fraser, Chief Executive Officer