Will bank earnings growth become a thing of the past?
It would be foolish to think the Wall Street giants can’t outrun the threat of AI
Earlier this year, investors furiously sold stocks in software companies for fear that, despite seemingly solid financial results, the value of their future businesses was in dire jeopardy. A more subtle version of this is happening to the biggest US banks. Not only have their shares fallen of late, but investors are acting as if their bottom lines will never grow again.
Third-quarter earnings so far suggest Wall Street is doing just fine. JPMorgan on Tuesday reported earnings up 6 per cent in the third quarter. Goldman Sachs and Citigroup posted profit growth of 29 per cent and 17 per cent, respectively. Boisterous equity trading helped all three, making up for a more pedestrian — shrinking, at Goldman and JPMorgan — haul from fixed-income desks.
All the big banks are pretty optimistic about what’s coming, too, even if things may not get as riotous as they did earlier in the year. Goldman chief David Solomon acknowledged in a call to analysts that while June was “top decile” for trading and dealmaking, his bankers were still having a “top quartile” moment.
Judging by share prices, investors are implying this is as good as it gets. Consider a simplistic, back-of-envelope exercise: take JPMorgan’s forecast earnings of $68bn for this year, according to LSEG, and divide it by the bank’s cost of equity — RBC reckons 8 per cent is the sector’s average. That formula should give the value of the bank’s shares if its income never grows again.
The result, $850bn, is not far below where JPMorgan’s market capitalisation is today. It’s a similar story at Goldman and Citi, whose $260bn and $220bn market capitalisations are also just a whisker above what they would be worth if their earnings never budged from here on in.
True, they are still being helped by some market oddities. But as with software stocks, AI may be to blame for the gloom. JPMorgan’s Jamie Dimon and his peers fielded questions from analysts on Tuesday about whether personal finance agents will leave banks scrambling to retain deposits, and whether fintechs will gnaw away at their core businesses.
It’s not an idle fear. AI agents could indeed make deposits more expensive to attract and retain, which on its own would be a drain on profit. Even Goldman, while not a traditional bank, faces plenty of new digital challenges, from decentralised finance and tokenised assets to prediction markets.
But it would be foolish to think the Wall Street giants can’t outrun this threat. After all, they have two things in their favour: the trust of their customers, thanks in part to heavy regulation, and experience of past credit cycles. Back to the simplified analysis, if earnings grew at 2 per cent from now on, still less than global GDP growth, the banks would be worth at least a third more than today.
Keeping fintechs and agents at bay will admittedly require more spending. JPMorgan finance chief Jeremy Barnum reckons his bank roughly spends $700mn a year on AI, but that will surely rise. And the benefits are hard to quantify. Reason, perhaps, to worry about near-term profit expansion — but over the longer term, it would be unwise to assume Wall Street’s growth days are over.