Q3 22 Trending Earnings Topics Recap – Week of October 10th, 2022

Two people reviewing a graph on a laptop and monitor

Welcome back to the first weekly edition of our Q3 22 Trending Earnings Topics on trending topics, macro trends and key management commentary. With a busy week of earnings that saw major banks like JPMorgan, U.S. Bancorp, PNC Financial Services and Citigroup report, here are some key trending topics that emerged during earnings updates over this period:

Q3 22 Trending Earnings Topics: While most financial institutions have surpassed analyst revenue projections, they have impacted profitability by setting aside large volumes of reserve funds to account for the ongoing macro uncertainty and cover potential loan defaults. Banks are reporting on their reserve build and methodology in further detail this quarter

U.S. Bancorp – Prepared Remarks

During the third quarter, we achieved record net revenue totaling $6.3 billion.

Third quarter results were highlighted by strong revenue growth, well-controlled expenses and stable credit quality. This quarter, we added $200 million to our loan loss reserve, reflecting loan growth and our consistent through-the-cycle underwriting approach to risk management. At September 30, our CET1 capital ratio was 9.7%. Our tangible book value per share totaled $20.73 at September 30 or 3.2% lower than the prior quarter, driven by the impact of rising interest rates on our available-for-sale securities.

  • Andrew J. Cecere – U.S. Bancorp, Chairman, President & Chief Executive Officer

Our third quarter charge-off ratio of 0.19% improved slightly versus the second quarter of 2022 and third quarter of 2021 levels. The allowance for credit losses as of September 30 totaled $6.5 billion or 1.88% of period-end loans. The $200 million increase in our reserve this quarter was primarily reflective of loan growth and, to a lesser extent, uncertainties in the economic outlook.

  • Terrance R. Dolan – U.S. Bancorp, Chief Financial Officer & Vice Chairman

Citigroup – Prepared Remarks

At the end of the quarter, we had $18.7 billion in total reserves with a reserve to funded loan ratio of approximately 2.5%…

Over the last several years, we have been disciplined with our loan growth and consistent with our risk appetite framework. This framework includes credit risk limits that consider concentrations including country, industry, credit rating, and in the case of consumer, FICO scores. And importantly, these limits apply across the firm in aggregate, and we continuously analyze our portfolios and concentrations under a range of stress scenarios. As a result, we feel very good about our asset quality and reserve levels.

As I mentioned earlier, our reserves to funded loan ratio was approximately 2.5%, and within that, PBWM and US cards is 3.7% and 7.5%, respectively, both right around Day 1 CECL levels. In PBWM, the majority of our card portfolios skew towards higher FICO customers. And while we have started to see signs of normalization in both portfolios, NCL rates continue to be less than half of pre-COVID levels.

In our ICG portfolio, of our total exposure, over 80% is investment grade and non-accrual loans remain low and are in line with pre-pandemic levels at about 40 basis points of total loans. So, we are well reserved for a variety of scenarios, and we continuously evaluate our scenarios to reflect the evolving macro environment.

  • Mark A. L. Mason – Citigroup, Inc., Chief Financial Officer

JPMorgan Chase & Co. – Q&A

Question – Mike Mayo: Hi. Jamie, once again, I’m trying to reconcile your actions with your words. You’ve said publicly, you mentioned the hurricane, you mentioned a recession, you mentioned look out, and there are all sorts of risks. I don’t think anyone disagrees with that. On the other hand, your reserves-to-loans are still well below CECL day one, so your actions with the reserving don’t seem to reflect your more pessimistic comments about the economy. So, how do I reconcile the two?

Answer – Jamie Dimon: Yeah, so the way to do that is in our CECL – in our reserves today, there is a significant percentage probability that we put on adverse and severe adverse already, so it’s in there already. A lot of people work in these CECL reserves, our economists, Jeremy, a lot of other folks. So, it’s not set by me, because I happen to think that the odds might be different than other people, and so – but I completely understand what you’re saying and – but the numbers are very good. We have some of that. I’m trying to be very honest about if things get worse, here is what it might – will mean for reserves. That may be different because, of course, these calculations change all the time, but…The other thing, Michael, which is another thing which in CECL, the timing of when something happens is very important. So, if it happens – if you said a recession is going to happen in the fourth quarter of next year, that would be very different to you say what’s to going to happen in the first quarter of next year.

  • Jamie Dimon – JPMorgan Chase & Co., Chairman & Chief Executive Officer

Bank of America – Prepared Remarks

Provision expense was $898 million in the third quarter and that was $375 million higher than the second quarter, and we built $378 million of reserve in the period compared to a modest release in Q2. The reserve build in the quarter primarily reflects good credit card loan growth and a dampened macroeconomic outlook.

Even as we build our reserves for the future, this quarter we saw many of our asset quality metrics continue to show modest improvement as NPLs and reservable criticized both declined from Q2, and you can see that in the supplement.

On slide 14, we highlight the credit quality metrics for both our Consumer and Commercial portfolios, and there’s only one point I want to make looking at this slide and that is delinquencies, because our Consumer delinquencies remain well below pre-pandemic levels. And as Brian noted earlier, we’re watching closely the early-stage card delinquencies as they begin to increase modestly.

Lastly, the recent Hurricane Ian impacted some areas where we have strong market shares for many of our businesses, and our teams have spent the past days assessing the damages and insurance coverage down to the loan level, and we’ve already incorporated that analysis into our reserves for the quarter. We compared our analysis to other large storms in recent years like Sandy, Harvey, and Irma, where we incurred just a small amount of financial losses.

  • Alastair Borthwick – Bank of America Corp., Chief Financial Officer

PNC Financial Services Group – Prepared Remarks

Our credit metrics are presented on slide 10. Non-performing loans of $2.1 billion increased $22 million, or 1% compared to June 30th, and continue to represent less than 1% of total loans. Total delinquencies were $1.6 billion on September 30th at $115 million or 8% increase linked-quarter. The increase was driven by elevated levels of administrative delinquencies, the majority of which have already been or are in the process of being resolved.

Net charge-offs for loans and leases were $119 million, an increase of $36 million linked-quarter, primarily driven by higher commercial loan net charge-offs. Our annualized net charge-offs to average loans continues to be historically low at 15 basis points. Provision for the third quarter was $241 million compared to $36 million in the second quarter. The increase reflected slightly weaker economic expectations, which impacted our macroeconomic scenarios and weightings. And during the third quarter, our allowance for credit losses remained essentially stable. Our reserves now total $5.3 billion and continue to be 1.7% of total loans.

  • Robert Q. Reilly – The PNC Financial Services Group, Inc., Chief Financial Officer & Executive Vice President

Q3 22 Trending Earnings Topics: Organizations are readily aware of the stark possibility of a recession in 2023 as the economic outlook continues to dampen. Management teams are reporting on how they plan to address the possible business impacts that might surface following a recessionary event

Walgreens Boots Alliance – Q&A

Question – Charles Rhyee: Yeah. Thanks for taking the questions. Just wanted to follow up. As we think about the macro environment and we are potentially moving into sort of a recessionary environment, can you talk about sort of what you guys are planning in your assumptions in the guidance, particularly for this next fiscal year and maybe beyond to kind of basically get ahead of a potential slowdown in the economy?

Answer – James Kehoe: Yeah. Maybe I’ll just give you some of the impacts that are already assumed in the P&L. And we’ve essentially planned for a moderate recession. But there are significant impacts in the income statement. We’ve got about $0.08 or $0.10 of higher interest cost. We’ve got lower pension returns in the UK. That’s like $0.04.

And the labor investments we’ve talked about are not necessarily directly a recession impact, but we have a very high level of inflation planned in the income statement. So, I think the total inflation impact in the US income statement is probably, I guess, $700 million and we have a significant cost program in the US, the TCM program offsetting that, right.

And then the other things, we do have – still have some assumptions on supply chain and inflation. I see that a little bit as of an opportunity. We see China becoming less difficult right now and shipments are coming out way faster. And I think there is a bit of a release in the system. The latest inflation numbers are not particularly encouraging, but we’ve planned the inflation side of the envelope quite in a detailed way…

So, looking forward, we have planned for inflation. But our offsets are coming from a lot of the levers we pulled in the current year. One is we are assuming next year a comp growth of about 2% to 3%. So we’re not expecting an acceleration versus the previous year. We’re expecting repeat what we did in the base year.

  • James Kehoe – Walgreens Boots Alliance, Inc., Executive Vice President & Global Chief Financial Officer

JPMorgan Chase & Co. – Q&A

Question – Ebrahim H. Poonawala: Good morning. I guess just following up, Jamie, so appreciate CECL and the model-based approach. I think you were quoted in the press talking about potential for a recession in the next six to nine months. Would appreciate any perspective in terms of, are you beginning to see cracks either be it commercial real estate, consumer where it feels like the economic pain from inflation, higher rates is beginning to filter through to your clients. Would appreciate any insights there.

Answer – Jeremy Barnum: Yeah, I’ll take that, Ebrahim. Thanks. The short answer to that question is just no. We just don’t see anything that you could realistically describe as a crack in any of our actual credit performance. I made some comments about this in the prepared remarks on the consumer side, but we’ve done some fairly detailed analysis about different cohorts and early delinquency bucket entry rates and stuff like that. And we do see, in some cases, some tiny increases, but generally, in almost all cases, we think that’s normalization, and it’s even slower than we expect, so…

Answer – Jamie Dimon: Yeah. I think I’d say, we’re in an environment where it’s kind of odd, which is very strong consumer spend. You see it in our numbers. You see it in other people’s numbers, up 10% prior to last year, up 35% pre-COVID. Balance sheets are very good for consumers. Credit card borrowing is normalizing, not getting worse. You might see – and that’s really good, so you can go into a recession, you’ve got a very strong consumer.

However, it’s rather predictable if you look at how they’re spending, and inflation, so inflation, if it’s 10%, reduces that by 10%. And that extra cap money they have in the checking accounts will deplete probably by sometime midyear next year. And then, of course, you have inflation, higher rates, higher mortgage rates, oil, volatility, war. So those things are out there, and that – it’s not a crack in current numbers. It’s quite predictable it will strain future numbers.

  • Jeremy Barnum – JPMorgan Chase & Co., Chief Financial Officer
  • Jamie Dimon – JPMorgan Chase & Co., Chairman & Chief Executive Officer

Delta Air Lines – Q&A

Question – Brandon R. Oglenski: Glen, I’m sure you’ve gotten this from a lot of investors, but obviously folks are worried about a looming recession in the US just driven by rates and inflation, and we’re reminded of that again today. But obviously your revenue guidance is pretty positive. But I do think it’s a sequential decline in your yields. Can you talk to the components there, because I know your long-haul flying is coming up as well, and just if you’re seeing any weakness or softness across your geographies.

Answer – Glen William Hauenstein: Yeah, I think that’s a great question, and I’m happy to explain it. Really, it’s three main factors. One is international restoration continuing in 4Q as we – as Pacific continues to open up and we continue to increase our capacity in the Pacific. That has downward pressure on RASM. Domestic stage is going up dramatically and at a different rate than some of our competitors and – all of our competitors as we head into 4Q. That’s really being driven by a lot of additional flying into Hawaii from the East Coast hubs that we didn’t have pre-pandemic. And lastly, it’s that period and the shift of the holiday return in December where December will be below trend and January will be above trend. So those are the three main factors that are driving the sequential decline.

And we’re not seeing – taking those out, we’re not really seeing a decline at the market level. It’s actually continuing to be quite strong, and we don’t just see any impact yet. We’re looking of course vigilant of looking forward, and we’ll make adjustments as necessary if it does, but I think Ed was very clear earlier that we think that we have – we’re as an industry very off trend in terms of our percent of GDP, and just getting back to that represents a huge upside to the industry.

  • Glen William Hauenstein – Delta Air Lines, Inc., President

Citigroup – Prepared Remarks

So, before I get into the quarter, let me highlight some observations about what we see going on around the world given our unique vantage point. The global macro outlook that we shared with you over the last couple of quarters has been borne out. There is accumulating evidence of slowing global growth, and we now expect to experience rolling country-level recessions starting this quarter. The severity and timing of these recessions depend where in the world you are, although persistently high inflation is driving a global softening of consumer demand for goods.

In the Eurozone and the UK, the supply shocks are most severe. Growth prospects have deteriorated sharply, and headline inflation is running at nearly 10%. All eyes are on this winter’s weather forecast and the energy supply.

The US economy, however, remains relatively resilient. So, while we are seeing signs of economic slowing, consumers and corporates remain healthy, as our very low net credit losses demonstrate. Supply chain constraints are easing, the labor market remains strong, so it is all a question of what it takes to truly tame persistently high core inflation.

Now, history would suggest that that will be quite a lot and for some time. Therefore, we could well see a mild recession in the second half of 2023. We believe the US economy is well-positioned to withstand it, all else being equal, in the geopolitical arena that is…

Against this backdrop, today, we reported net income of $3.5 billion, EPS of $1.63, and an RoTCE of 8.2%. We grew revenues by 6%, including a gain on sale of our consumer business in the Philippines. While we had excellent performance in some areas, our results could have been better in a few others.

  • Jane Nind Fraser – Citigroup, Inc., Chief Executive Officer & Director

With significant layoffs and hiring slowdowns at major institutions like Coinbase, Robinhood, Meta and Peloton throughout 2022 due to a variety of macroeconomic reasons, there are promising signs in certain companies that continue to prioritize hiring in a tight labor market, while others remain vigilant of market conditions

Walgreens Boots Alliance – Prepared Remarks

With demand for pharmacy services at an all-time high due to COVID-19, we have seen a tightening in the labor market for pharmacists and pharmacy technicians. This has unfortunately led to staffing shortages in some of our markets, in turn creating a headwind for prescription growth.

Scripts were up a softer-than-expected 1.4% in fiscal year 2022. We are focusing investments to return about 3,000 stores to normal operating hours, which I expect will drive script volume recovery as we move through fiscal year 2023.

We’re seeing positive staffing trends with 11 straight weeks of net pharmacist head count increases. We have also opened our eighth automated micro fulfillment center and are now supporting 1,800 total stores. Our pace is somewhat slower than expected, in part due to supply side construction delays, but I’m pleased with the performance of the centers we do have up and running. These facilities remove routine tasks and excess inventory from the pharmacy, which is expected to reduce working capital by over $1 billion over time.

  • Rosalind Gates Brewer – Walgreens Boots Alliance, Inc., Chief Executive Officer & Director

Bank of America – Prepared Remarks

Our head count this quarter increased by 3,500, and if we adjust for the release of our summer interns, our head count’s actually up by closer to 5,500. We welcomed 1,800 new full-time associates from college campuses around the world into our company this quarter, and we hired another 3,800 net new people on top of that. That included just less than 3,000 across our various lines of business and another 1,000 in staff and support and technology positions to support those lines of business. And with all the great benefits and talented people already at this company and with our great brand, it highlights that Bank of America is a great place to work.

  • Alastair Borthwick – Bank of America Corp., Chief Financial Officer

Domino’s Pizza – Prepared Remarks

From a delivery capacity perspective, we saw progress throughout the quarter resulting from our initiatives in this area. While we only have visibility to our corporate stores, the number of job applications and new hires have increased throughout the year. And at the end of the quarter, we were more or less back to 2019 levels as far as applications and new hires per week.

Staffing remains a constraint, but my confidence in our ability to solve many of our delivery labor challenges ourselves has grown over the past few quarters. Our delivery service also showed improvement throughout the quarter. While we still have work to do to get back to our high standards for delivery service, I am encouraged by the progress we’ve made so far. Estimated average delivery time has improved every quarter this year.

Additionally, our system is all-in on another boost week for Q4, indicating their confidence in handling the increased volume. A boost week in each of three consecutive quarters represents a return to our pre-pandemic boost week cadence.

  • Russell J. Weiner – Domino’s Pizza, Inc., Chief Executive Officer & Director

BlackRock – Prepared Remarks

We are continuing to pursue critical hires that support our near-term growth but are pausing the balance of our hiring plans for the remainder of 2022. In addition, we now expect our full-year increase in 2022 core G&A to be in the range of 13% to 15%, lower than our previous guidance of 15% to 20% that we communicated in January. While these steps will not materially impact our 2022 results, they will better position us going into 2023 should market headwinds persist.

  • Gary S. Shedlin – BlackRock, Inc., Chief Financial Officer & Member-Global Executive Committee

JPMorga Chase & Co. – Q&A

Question – Mike Mayo: Yeah. Last follow-up. I know you invest through cycles. You’ve always done that, you’re consistent, but I mean your head count increase is probably going to be the highest in the industry. I mean head count from 266,000 to 288,000; your CIB, you’re adding head count. And if you did expect weakness in nine months from now, wouldn’t you wait to hire people? Maybe get them a little cheaper.

Answer – Jamie Dimon: No.

  • Jamie Dimon – JPMorgan Chase & Co., Chairman & Chief Executive Officer

Thanks for reading this issue of the Earnings Recap blog for the Q3’22 Earnings season. Stay tuned for our trending topics recap next week.

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