Welcome to this edition of the Q2 2022 earnings season weekly update on trending topics, macro trends and key management commentary. We’ll feature highlights from earnings call transcripts of S&P 500 companies throughout the Q2’22 earnings season. Leading off a busy earnings week for the Banking sector, JP Morgan, Bank of America, PNC, US Bancorp, Citigroup, Morgan Stanley, BlackRock and Wells Fargo were among some of the top financial institutions that reported earnings last week. Here are some key trending topics that emerged during earnings updates over this period:
- Likelihood of a Recession: While the ongoing market volatility has led to widespread concerns globally, organizations are frequently being asked about their thoughts on the economic outlook and how they plan to mitigate any potential business impacts in the event of a recession
- Inflationary Impacts : A persistent increase in inflation continues to drive a notable shift in consumer spending habits, while corporations are adjusting their business strategies to cope with the disruption and brace for the consequences over the long-term
- Geopolitical Instability: As the economic backdrop remains uncertain, the geopolitical tensions generated from the Russia-Ukraine conflict alongside other events continue to escalate, applying pressure on supply chains across the globe and prompting companies to address associated organizational risks
While the ongoing market volatility has led to widespread concerns globally, organizations are frequently being asked about their thoughts on the economic outlook and how they plan to mitigate any potential business impacts in the event of a recession.
First Republic Bank Q&A
Question – Steven Alexopoulos: Hi again, everyone. Thanks for taking the follow up. The theme of safety and stability has been emphasized quite a few times on the call today. And I want to ask a follow up to Jim. I know you’re not an economist, but you are one of the longest standing executives in the industry. And like you said, you’ve seen a few cycles over the past 37 years. Jim, from a big picture view, with all the uncertainty out there, what’s your assessment of the risk of what lies ahead and what are you most focused on today? Thanks.
Answer: Hi, Steve. Well, I’m not an economist, but maybe the scars are better than (01:11:00), I’m not sure which. But I think we’re seeing a kind of a normal, but somewhat rapid tightening cycle play out following an excessively long period of cheap money. I started a bank in August of 1980, before this one, and lived through the Volcker years. And they were pretty brutal. But on the other hand, it worked out, had to have two recessions. But the rest of the 80s were actually quite attractive. So I think what we’re seeing is the beginning of the solution. You’re watching some prices begin to stabilize, has not come down, some are coming down. You’re watching people pull back, particularly in the Valley and in tech pull back on employment; if not letting go, they’re certainly stopping their hiring. And so it’s a normal process. The Fed has to play catch-up. They’re behind, and they’re likely to do so pretty quickly. So I think you’re likely to see the recession is probably coming of some kind and it will stabilize a lot of the excesses. I don’t think that it’s threatening overly to us. We’re not naïve and obviously it’s a challenge. But I think it’ll be fine. The quicker the rates go up, the faster inflation will be resolved. The thing that Volcker did that’s so important is he moved really boldly and got ahead of it. But it took two recessions to get there and not that I’m predicting that because I’m not. But so I think we’re just fairly – we’re in a maybe the second or third inning of what’s going to be required to get inflation under control. That would be my personal opinion.
- James H. Herbert, II – First Republic Bank (San Francisco, California), Founder & Executive Chairman
Citigroup, Inc. – Prepared Remarks
There are mounting costs to the series of supply shocks we’ve experienced, and now we need to pay attention to an additional S in ESG, and that is security. In addition to energy and cybersecurity, food security has also come into sharper focus, threatening to spread the humanitarian cost of the war well beyond Europe. Resiliency is the new priority for governments and corporations alike. And all of this is adding to inflationary pressures which are in turn being met with a more hawkish response from the Fed and other central banks, all contributing to sharply lower US consumer confidence. Higher rates and QT will keep volatility high.
That said, while sentiment has shifted, little of the data I see tells me the US is on the cusp of a recession. Consumer spending remains well above pre-COVID levels, with household savings providing a cushion for future stress, and as any employer will tell you, the job market remains very tight. Similarly, our corporate clients see robust demand and healthy balance sheets, with revenue softness attributed to supply chain constraints so far. So, while a recession could indeed take place over the next two years in the US, it’s highly unlikely to be a sharper downturn as others in recent memory.
- Jane Nind Fraser – Citigroup, Inc., Chief Executive Officer & Director
Delta Air Lines, Inc. – Prepared Remarks
Like all consumer businesses, we’re closely monitoring consumer behavior and have yet to see any meaningful pullback in demand. However, if demand were to weaken, I’m confident we have the tools and resources to remain profitable through the cycle. The last time an economic recession hit our business was in 2009. And absent fuel hedge losses at that time, which we no longer utilize, Delta was profitable that year.
Comparing then to now, Delta’s business has structurally evolved in significant ways over the last decade, building a trusted and premium consumer brand with proven competitive advantages, within a much-improved industry.
Our revenues are far more diversified, with much larger contributions from our premium product offerings and high-margin Loyalty business, as well as our growing MRO and Cargo businesses. And our balance sheet and access to capital are much stronger as proven during the pandemic. We’ve recently made major customer enhancements that will strengthen our brand for years to come, including recent openings this quarter of world-class airport facilities at LAX and New York’s LaGuardia Airport, two largest markets for travel in the country as well as new Delta Sky Clubs in key markets.
- Edward Herman Bastian – Delta Air Lines, Inc., Chief Executive Officer & Director
JPMorgan Chase & Co. Q&A
Question – Mike Mayo: So clearly, running the company for next 5 to 10 years, if we have a recession in the next 5 to 10 months, how does technology help you manage through that better, whether it’s credit losses, managing for less credit losses, expenses, more flexibility, or revenues maybe gaining market share? What’s the benefit of all these technology investments if we have a recession over the next…
Answer: I think we gave you some examples at Investor Day. For example, AI, which we spend a lot of money on, we gave you a couple examples. But one of them is we spent $100 million building certain risk and fraud systems so that when we process payments on the consumer side, losses are down $100 million or $200 million with volumes way up. That’s a huge benefit. I don’t think you’d want us to stop doing that because there’s a recession. And so plus, in a recession, certain things get cheaper. Branches are enormously profitable. Banks are enormously profitable. And we’re going to keep on doing those things, and we’ve managed through recessions before. We’ll manage it again. And I’m quite comfortable we’ll do it quite well.
- Jamie Dimon – JPMorgan Chase & Co., Chairman & Chief Executive Officer
PNC Financial Services Group Inc. Q&A
Question – Gerard Cassidy: Very good. Credit quality, obviously, was quite strong for you folks, similar to the prior quarter. And Bill, I don’t know – I know there’s a lot of uncertainty out there with what’s going on in the world, but it just seems that for your company at least, you are so well positioned from a credit quality standpoint. And is it – are we just going to go off a cliff or something at the end of the year with some sort of big recession that has frightened everybody about credit quality for banks in general and any elaboration on your outlook on credit and the outlook for the economy?
Answer: Yeah. Look, I don’t think there’s any cliff involved. I do think that the trouble ahead lies somewhere in the middle of next year, not any time in the next six months. But what you’re seeing inside of our credit book, you got to remember that during this period of time, we continue to kind of run off a higher risk book from BBVA and our loan growth is largely in higher quality names. So the overall quality of our book actually improves quarter on quarter. Eventually, that has to stop. And eventually, I think the Fed has to slow the economy to a pace to get inflation under control and I think that’s going to be harder to do than the market currently assumes and I think it’s going to take longer than the market currently assumes. And when that happens, we’re going to see credit costs go up, at least back to what we would call normalized levels. But I don’t think – I don’t see any particular bubbles inside of the banking system as it relates to credit. I think you’re just going to see a slow grind with credit losses increasing over time as we get into the slowdown.
- William Stanton Demchak – The PNC Financial Services Group, Inc., Chairman, President & Chief Executive Officer
A persistent increase in inflation continues to drive a notable shift in consumer spending habits, while corporations are adjusting their business strategies to cope with the disruption and brace for the consequences over the long-term.
Goldman Sachs Group Inc. – Prepared Remarks
I’m pleased with our performance this quarter. There’s no question that the market environment has gotten more complicated, and a combination of macroeconomic conditions and geopolitics is having a material impact on asset prices, market activity and confidence. We see inflation deeply entrenched in the economy, and what’s unusual about this particular period, is that both demand and supply and are being affected by exogenous events, namely the pandemic and the war in Ukraine. In my dialogue with CEOs operating big global businesses, they tell me that they continue to see persistent inflation in their supply chains. Our economists meanwhile say there are signs that inflation will move lower in the second half of the year. The answer is uncertain and we will all be watching it very closely.
Given all of this, we are seeing shifts in monetary policy, and those shifts will continue to tighten economic conditions. I expect there’s going to be more volatility and there’s going to be more uncertainty. And in light of the current environment, we will manage all our resources cautiously and dynamically. Our risk management culture and capabilities should help us navigate this environment for our clients and for the firm. That said, there is nothing about this environment that changes our strategy, and we are committed to our medium-term targets. We have a strong client franchise, and we remain focused on providing differentiated service. We benefit from the diversity of our businesses and our global footprint. In light of the environment, we’re certainly taking deliberate action on capital and expenses, but we will also continue to invest to strengthen and grow our firm.
- David Michael Solomon – The Goldman Sachs Group, Inc., Chairman & Chief Executive Officer
Morgan Stanley – Prepared Remarks
Given the broader market uncertainty and inflationary environment, we are focused on discretionary spend while balancing continued investment initiatives and ensuring the right controls are in place to support future growth. As a management team, our priority is to diligently address what we can control given the market realities. We will continue to review incremental spend as we regard efficiency as a critical performance objective.
Now to the businesses. Institutional revenue of over $6 billion demonstrates the power of our balanced franchise against a difficult market backdrop. Revenues declined from the exceptionally strong prior year while the backdrop was challenging for Investment Banking, particularly underwriting. Fixed income and equities led the strength of the quarter as clients navigated volatile markets.
- Sharon Yeshaya – Morgan Stanley, Chief Financial Officer
PepsiCo, Inc. Q&A
Answer: Yeah, hi, Dara. Yeah, obviously, our past – (00:05:29) partners and ourselves were looking at consumers very carefully and the evolution of their decision when it comes to the overall basket or particular categories. So, normally, we have pretty positive conversations with our partners and we’re looking at how do we continue to keep our consumers in our categories as we obviously have to pass some of these costs to the consumer, how do we do it in a way that doesn’t impact volume and it continues to generate growth for them and growth for us, and those are the type of conversations we’re having.
Question – Dara Mohsenian: So, I just want to talk a bit about pricing relative to costs, obviously another quarter of very exceptionally strong pricing in Q2. Ramon, are you hearing any pushback from the retailer trade that’s different than normal? It’s been a topic of discussion more in CPG in general, so just curious for your views on retailer pushback and ability to continue to take pricing going forward, including what that might mean for the fall.
Obviously, we’re all concerned in a way about the high inflation and how that’s going to impact, especially as we look at the full consumer universe, the lower part of the income pyramid, that’s where we’re all looking more carefully and we’re making decisions on entry point in the categories and how do we continue to have that particular consumer engage in our categories. The conversations are always – there’s always tensions in those conversations, there will continue to be tensions. But in general, they’re very positive conversations the ones we have because we play a role and that’s our strategic intent to be growth drivers for our partners and we go to these conversations very transparently and very positively to generate growth and additional margin for our customers. So, that’s the way the situation is, and we’ll continue the balance of the year and into as we start thinking about the plans for next year.
- Ramon L. Laguarta – PepsiCo, Inc., Chairman & Chief Executive Officer
State Street Corp. – Prepared Remarks
Lastly, in response to industry inflationary cost pressures, we’ve undergone a comprehensive analysis of our pricing across all our product areas. The result of this analysis has led to the decision to begin to adjust our client pricing upwards in certain areas of servicing, where the wage pressure is most acute and industry capacity is stretched. Ultimately, we believe these pricing changes will support the continued investment that allows us to best serve our clients.
- Eric W. Aboaf – State Street Corp., Vice Chairman & Chief Financial Officer
Wells Fargo & Co. – Prepared Remarks
Let me start with some second quarter highlights. We earned $3.1 billion in the second quarter. Our results included a $576 million impairment of equity securities predominantly in our venture capital business due to market conditions. Revenue declined as growth in net interest income driven by rising interest rates and higher loan balances was more than offset by lower noninterest income as market conditions negatively impacted our venture capital, mortgage banking, investment banking, and wealth management advisory businesses. We continued to execute on our efficiency initiatives and our expenses declined from a year ago even with inflationary pressures and higher operating losses.
We have broad-based loan growth with both our consumer and commercial portfolios growing from the first quarter and a year ago. Credit performance remained strong. Our allowance reflected an increase due to loan growth. While we’re monitoring risks related to continued high inflation, increasing interest rates, and the slowing economy, which will impact our customers, consumers and businesses have been resilient so far. When looking at simple averages across our entire portfolio, consumer deposit balances per account increased from first quarter and a year ago and remained above pre-pandemic levels.
- Charles William Scharf – Wells Fargo & Co., President, Chief Executive Officer & Director
As the economic backdrop remains uncertain, the geopolitical tensions generated from the Russia-Ukraine conflict alongside other events continue to escalate, applying pressure on supply chains across the globe and prompting companies to address associated organizational risks.
BlackRock Inc. – Prepared Remarks
The first half of 2022 brought on a combination of macro, financial, and economic challenges that investors haven’t seen in decades. Rising energy prices, disrupted supply chains, and hawkish pivots of central banks to confront inflation has sparked a reassessment of growth, profitability, and risk across financial markets.
Central banks are trying to reign in supply-driven inflation running at multi-decade highs without triggering a deep recession. Demand in the economy now is about the same as it was in pre-COVID, but as pandemic restrictions have lifted, we’re seeing that it’s easier to restart demand than it is to restart supply.
Countries and companies were already reevaluating their interdependencies following supply chain disruptions during the pandemic, and the Russian invasion of Ukraine has only intensified the prioritization of supply chain resiliency and security over cost of these supply chains and efficiencies of these supply chains.
In the United States, the Fed’s effort to fight inflation through faster rate hike helped push the US dollar to a 20-year high in the quarter, impacting consumers, companies, portfolios in the United States and around the world. US companies with international businesses, including BlackRock, are facing foreign exchange headwinds, impacting the value of their overseas earnings. Markets are reflecting investor anxiety as investors evaluate the potential impact of these pressures.
2022 ranks as the worst start in 50 years for both stocks and bonds, with global equity markets down 20% and the aggregate bond index down about 10%. While BlackRock is not immune to these markets and foreign exchange headwinds, we see it as an opportunity to strengthen our relationships with all our clients worldwide. And it is during these uncertain times like these that the resiliency and diversification of our platform is most evident.
- Laurence Douglas Fink – BlackRock, Inc., Chairman & Chief Executive Officer
PepsiCo Inc. Q&A
Question – Chris Carey: Hi. Good morning. So, just a couple questions on some of these more topical markets I guess. Just in Europe, if anywhere, this is where elasticity seems to be playing out. Are we finally seeing the consumer come undone a bit here as pricing has built? Are there other factors in play that could (00:38:58) impact volumes, whether supply chain, product availability, basically anything else besides pure consumer elasticity?
Answer: Yeah, good. Listen, Europe obviously has been impacted by – more than other parts of the world by, I would say, the war, so our business has been impacted both in Ukraine and Russia. Ukraine because obviously, we had to stop a lot of our manufacturing commercial activities as reflected in our performance in Europe, and also, in Russia, given the commitments we made to stop our beverage, some of our beverage large brands and also stop advertising and promotion of our more essential food brands. Clearly, that’s part of the reason why the European business has been impacted.
- Ramon L. Laguarta – PepsiCo, Inc., Chairman & Chief Executive Officer
Citigroup, Inc. – Prepared Remarks
On slide 9, we provide an update on our exposure to Russia. In 2Q, we reduced our exposure by $3.1 billion in local currency terms, which was more than offset by the ruble appreciation. As of today, the mix of our exposure has changed and is now reflecting a higher proportion of stronger credit names. Additionally, our net investment in our Russian entity is now approximately $1.2 billion, up from about $700 million due to the ruble appreciation. As a result of the actions that we’ve taken to reduce our risks, we now believe that under a range of severe stress scenarios, our potential capital impact is estimated to be approximately $2 billion, down from the $2.5 billion to $3 billion last quarter.
- Mark A. L. Mason – Citigroup, Inc., Chief Financial Officer
Goldman Sachs Group Inc. Q&A
Question – Christian Bolu: Good morning, David and Denis. So you posted pretty strong results this morning. You continue to take market share in trading, ROE year-to-date is 13%, just pretty good given the backdrop. But, man, you guys’ tone sounds very, very cautious. So what exactly are you worried about in the macro backdrop, maybe just more specifically? And how does that impact your thinking on a timeline to achieve medium-term ROE targets?
Answer: [excerpt]…Now with respect to our targets, I want to be clear we set medium-term targets for 2024, and we still plan on meeting those targets, we don’t see anything in this environment that will prevent us from meeting those targets. I’m not going to speculate on a quarter-by-quarter basis as to what the trajectory looks along the way. But I would say in what’s been certainly a very difficult first half of the year if you think about the headwinds we faced in both public equity markets because of the war in Ukraine and the unwind of the business in Russia, et cetera, I think there have been some exogenous events in this first half of the year that certainly created bigger headwinds than we might see in other times going forward. So we remain comfortable and committed to our targets, and we’ll continue to move forward expeditiously to meet them.
- David Michael Solomon – The Goldman Sachs Group, Inc., Chairman & Chief Executive Officer
Thanks for reading this issue of the Earnings Recap blog for the Q2’22 Earnings season. Stay tuned for our trending topics recap next week!