Big Banks Ride the AI Boom

Hey listeners, it's Thursday October 15th, I'm Pierre-Bienailles for the Wall Street Journal. And this is what's news in earnings, or look at some of the biggest themes standing out this earnings season. Big banks opened the season with big and growing profits, and warnings that rising interest rates could stop the party. JP Morgan Chase, Goldman Sachs, City Group, and Wells Fargo each reported higher third quarter profit and revenue from a year earlier. Revenue across all four increased 9% to $115 billion. Wall Street Journal Banking and Payments Reporter Ben Glickman joins me to talk about the bottom line and the possible threats looming for Wall Street. Ben, how did the Federal Reserve's recent interest rate hike, the first in a while, affect banks' bottom lines this quarter? The short answer is it hasn't significantly yet. But the yet is sort of the crucial part there. So benchmark interest rates, when they go up, they generally slow down the economy. Companies make fewer investments, generally leads to more unemployment. All of that stuff is what would threaten to kind of pop this good sequence of quarters that we've had for banks. There's also just kind of a general impact on banks' core lending profitability, which is banks have a lot of assets on their books, loans that essentially have floating rates. So when benchmark rates go up, all the other rates go up, usually, and that leads to them earning more on their loans without much additional cost. But banks do a big business facilitating trades on behalf of clients in bonds and basically across the biggest banks, that business underperformed expectations in the third quarter. And executives, some explicitly, some more kind of implicitly connected this back to the fact that there was all this bond market volatility in the second half of September. And that followed the first rate hike that we saw. Yes. So there's a lot of concern from investors about that bond market. I guess there we're talking less about interest rates than about just the turmoil that's going on around the globe as far as conflicts go. Yeah, exactly. There's sort of two elements to parse here. One is that rates are higher, but also more importantly, the actual bond market was quite tumultuous, especially in the last few weeks. And this makes it an even more challenging operating environment for a lot of companies. Generally banks do better when big companies where their clients are willing to do big things. So mergers, they want to trade commodities, hedge against risks. All of these things that companies are doing to financially position themselves are good for banks. And there's something like this crazy volatility in bond markets, which pushed yields up to quarter century highs. That just generally slows down a lot of the decision-making that can lead to these kinds of good fees for banks. And we've had some big IPOs that have been delayed or pulled back lately. There's Oro, the smart ring maker, and an AI data center company in Australia called Firmis. What do the bank executives say about market conditions for IPOs and other types of deal-making? Several executives, including from JP Morgan, flagged that the last few weeks of September saw a marked slowdown in activity. Generally executives see this as still quite an active environment, regulatory environment under the Trump administration as quite permissible. Stocks generally, despite all this kind of bond market turmoil, are doing quite well. The concern is more so if people go from delaying these kinds of big IPOs and big M&A transactions to deciding not to do them altogether, that is when bank executives and deal-makers and capital markets bankers, they all start to get a little bit more nervous. It's all a pretty fast swing from the huge blockbuster IPO as we saw earlier this year. And some of the big expected ones coming up. Yes, absolutely. There are these huge IPOs that are coming down the pike, including Anthropic and OpenAI. So, when you see something like even a smaller IPO like ORA deciding to hold off, it's a negative signal for those who are looking one month, two months, three months down the line. And obviously those IPOs have really big implications for the whole AI build out. It's a huge influx of capital for these firms as they're still looking to invest. Billions in building data centers, investing in compute, all these big drivers of economic growth in the US at this point. Ben, could we look at some of these earnings in a little bit more detail? I know that you looked at JP Morgan pretty closely. The biggest bank? Yes. So, JP Morgan was an interesting one this quarter. A lot of the core businesses perform quite well. They have an enormous consumer bank and all the signals were positive coming from that. The actual bottom line profit number fell short of analyst expectations, which is not something that happens very often for JP Morgan. It's happened a handful of times in the last couple of years. A lot of that was because of slightly slower trading and investment banking than analysts on Wall Street were expecting. Right, all in all, JP Morgan's profit was $15.31 billion. And how about Goldman Sachs, it posted a profit of $5.29 billion and it had its second best quarter ever for revenues? Yes, very strong results from Goldman. A big part of Goldman's results as well as the other big banks is this AI build out what we call hyperscalers, the giant tech companies. They're still building data centers, they're buying more chips. They have all these enormous financing needs and they need additional capital from Wall Street to do that. So this has been an enormous boost for investment banks and Goldman I think was probably the best sign that those good times are still rolling. That was the Wall Street Journal's Ben Glickman, Ben thanks so much, thanks for having me. And that's what's news in earnings. Today's show was produced by me and Anthony Bansy with supervising producer Taliar Bell and deputy editor Chris Sensley. Later today we'll have the PM edition of what's news out for you as usual and we'll be back later this earnings season diving into another industry. Well then I'm Pierre Bianame, have a great day.