2023-10-17 18:18:00
Bank of America’s business with private customers is going well thanks to higher interest rates. The second largest bank in the USA exceeded expectations with its business figures presented on Tuesday. In the third quarter of 2023, the bank, which is based in the city of Charlotte in the state of North Carolina, named after a German princess, increased its net profit by a good 10 percent to $7.8 billion compared to the same quarter of the previous year. Consumer business contributed the largest share at $2.9 billion, followed by investment banking at $2.6 billion. The Bank of America share price reacted positively, with shares rising around 2 percent during trading on Wall Street on Tuesday.
In contrast, the investment bank Goldman Sachs, which has been spoiled for success for a long time, also suffered a decline in profits of a whopping 33 percent in the third quarter of 2023 compared to the same quarter of the previous year to $ 2.1 billion. Even if the decline in profits was not unexpected, Goldman Sachs shares lost almost one percent of their value on Tuesday. Goldman has been suffering from a costly but ineffective build-up of activities around mass retail banking since a record year in 2021, when the bank posted net profits of nearly $22 billion.
In the second quarter, Goldman had to make another write-down of around 500 million euros on the online consumer finance company Green-Sky, which was only acquired in 2021 for $1.7 billion. As Goldman announced a few days ago, Green-Sky is now being sold to a consortium of investment companies including Sixth Street Partners and KKR. In this respect, investors had expected a decline in quarterly profits. In addition, there were impairments on real estate investments amounting to $368 million, which reduced income by 20 percent to $3.2 billion.
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What is surprising at Goldman is the significant increase in costs, which were 18 percent higher in the third quarter than a year ago. The bank justifies this with higher expenses for salaries. At the beginning of 2023, however, Goldman Sachs initiated the largest job cuts since the financial crisis and wanted to shed 3,200 of the 49,100 employees at the time. In fact, the number of employees has fallen to 45,900. But Goldman Sachs has apparently given top performers higher salary subsidies to prevent a migration to competitors. “In February, we set a goal of achieving $600 million in salary efficiencies in 2023 and 2024, and we are currently on track to exceed that goal,” Goldman CFO Denis Coleman told analysts on Tuesday. These efficiency gains allow Goldman Sachs to invest in the best performing employees.
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However, business in investment banking, which has been sluggish since the Corona pandemic, is only slowly picking up, as the IPOs of chip designer Arm and sandal manufacturer Birkenstock show. Goldman’s revenue in this critical division rose 6 percent to $8 billion, accounting for more than two-thirds of the bank’s total revenue. For Deutsche Bank, which will publish its financial figures on October 25th, Goldman’s financial figures provide a mixed picture.
Higher earnings in stock trading
Goldman’s higher income in investment banking is largely due to the 8 percent increase in income from stock trading at $3 billion. However, Deutsche Bank largely stopped this global stock trading from summer 2019. Although private customer business and business with companies have since become more important at Deutsche Bank, the trading business in currencies, bonds and raw materials (FICC) is of crucial importance for Deutsche Bank, accounting for around a quarter of all group revenues. In this FICC business, however, Goldman generated 6 percent less income in the third quarter of 2023 than in the same quarter of the previous year.
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It was exactly the opposite at Bank of America. It increased its revenue in the FICC business by 6 percent. What is more important for this bank is that the lending business with consumers has not yet progressed without any major defaults. This is not a given, after all, interest rates on mortgage loans in the USA have risen from just under 3 percent to around 7.5 percent since 2021. Interest rates for consumption, which in the USA is often carried out using credit cards, even climbed by 6 percentage points to a whopping 21 percent in August. But so far, US consumers seem to be coping well with this rise in interest rates.
Brian Moynihan, Bank of America’s chief executive, spoke Tuesday of a “healthy, albeit slower-growing” economy in which his bank operates. Interest income rose 4 percent and Bofa set aside just $1.1 billion for bad loans, a small increase from $0.9 billion in the same period last year. It is also interesting that customer deposits fell by 8 percent. Even though the bank emphasized that its deposits were still 36 percent higher than before the corona pandemic, it turns out that money market funds attract money when US banks pay little interest on savings deposits.
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