By KEN SWEET, AP Business Writer
NEW YORK (AP) — Four big banks reported notable drops in first-quarter profit on Thursday, as market volatility and the war in Ukraine caused deals to be halted, while a slowdown in the housing market meant fewer people will seek to obtain a new mortgage or refinance.
Results from Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo were similar to results from JPMorgan Chase, which reported a double-digit drop in profit on Wednesday.
At Goldman Sachs, earnings fell 43% to $3.63 billion. Citigroup posted a 47% decline in profit to $4 billion, Wells Fargo profit fell 21% and Morgan Stanley profit fell 11%.
Somehow, comparing this quarter to the previous year doesn’t tell an accurate story of how well Wall Street is doing. The first quarter of 2021 was favored by the start of widespread vaccination campaigns against COVID-19, as well as by the recovery of the economy after the pandemic. Banks also released a large chunk of their bad-loan reserves — money they put aside to cover potentially bad loans in a tough economy — last year. Those were a unique boost to earnings.
But banks are often seen as a proxy for the broader economy, and the first quarter of 2022 has been considerably tougher than the year before. Markets have struggled with high inflation, as well as soaring oil prices caused in large part by the Russian invasion of Ukraine. Interest rates have also risen sharply in response to signals from the Federal Reserve that it plans to raise interest rates several times this year, which in turn has caused mortgage rates to rise.
Apart from the slowdown in trading, the war in Ukraine plus extensive international sanctions imposed on Russia weighed on the results of at least two banks, Citigroup and, to a lesser extent, Goldman Sachs. Citi said it had to book $1.9 billion in potential credit losses due to its exposure to Russia, where the bank operates a consumer banking franchise as well as a modest investment bank. Meanwhile, Goldman Sachs CEO David Solomon said the bank had a $300 million loss this quarter related to Russia.
That’s on top of the $1.5 billion JPMorgan set aside on Wednesday to cover higher costs from inflation, as well as its exposure to Russia.
But where banks really took a hit this quarter was investment banking. Goldman Sachs said investment banking revenue fell 40% from a year earlier, while Morgan Stanley reported a 38% decline in investment banking fees. Citigroup reported a 43% drop in investment banking revenue.
The drop in investment banking revenue largely has to do with companies that were sidelined in the quarter due to volatility.
Wells Fargo, which has a smaller investment bank, was hit harder by the housing market downturn. Wells mortgage origination revenue was down 33% from the prior year. Freddie Mac said the average 30-year fixed-rate mortgage hit 5% last week, almost double what it was less than a year ago.
“The rate increase caused a significant slowdown in mortgage banking, especially refinancing activity,” Kyle Sanders, an analyst at Edward Jones, which covers Wells Fargo, said in an email.
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