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The Institutional Risk Analyst by Christopher Whalen

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Will Rohit Chopra Kill Basel III? Shrinking NIM at JPM and WFC

  • Oct 14, 2024
  • 5 min read

Updated: Jul 9

October 15, 2024 | Our trip to Washington last week was more than a little productive and included several surprises. The gap between what is reported by the mainstream media – all of the mainstream media – and the reality on the ground is growing even as the November election approaches.


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Homestyle Deserts, Peekskill, NY


The big media continues to spew reports about the close presidential election contest, but in Washington Democrats are largely and notably silent. Republicans are quietly anticipating a win for the White House and the Senate. And as usual, much of what is occurring in Washington under President Joe Biden makes so sense at all. 


For example, CFPB Director Rohit Chopra may be about to kill the new Basel III capital rule for large TBTF banks. After the mugging of FDIC Chairman Jelena McWilliams in 2021, this latest tantrum is most unseemly. Chopra refuses to support the revised proposal offered by the Federal Reserve Board and Biden OCC, and is supporting the Republican members of the FDIC board in opposing the rule. This situation illustrates why former President Trump wanted to revise Executive Order 12866 to force agency heads to report up to the White House on policy issues where Congress has not provided explicit instructions.


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In opposing Basel III, Chopra is doing the bidding not of President Biden, but rather Senator Elizabeth Warren (D-MA). Yet it must be said that the big banks are very happy to have no revision to Basel III at all. If Chopra does not relent soon, then the Basel bank capital process will fail and an entirely new Basel III rule will need to be crafted in Trump II. While Warren flexes her political muscles, she may be dooming the Basel Accord to eventual death in the US. 


Going from the sublime to the ridiculous, the crowd of aspiring cabinet members for Trump II is growing. In this regard, we note that Cantor Fitzgerald CEO Howard Lutnick is not the chairman of the Trump II transition team, contrary to what you may have read in the New York Post last week. In fact, the veteran New York investment banker is one of almost a dozen Trump transition chairs. While VP Kamala Harris is already vetting cabinet members, Trump has yet to appoint a transition manager and reportedly will not do so until after the election.


Lutnick's bizarre comments to the media last week reportedly caused astonishment and anger in Palm Beach and on Capitol Hill, where he is barely known to most members of the GOP congressional leadership. Lutnick's gratuitous comment about members of the Heritage Foundation and Project 2025 being "radioactive" also caused considerable angst on Capitol Hill. Stay tuned. 


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Bank Earnings Update


JPMorgan (JPM) and Wells Fargo (WFC) reported Q3 2024 earnings on Friday. The results were largely a snoozer from an operational perspective, but the financial media and equity managers found a silver lining as always.  Headlines proclaimed the prospect of higher NIM for JPM in Q4, but we suspect that the opposite may be the case.


In Q3 2024, JPM’s revenue was down 20% sequentially from the $50.2 billion reported in Q2, but if we back out the $7.9 billion in extraordinary gains related to the sale of Visa (V) shares, JPM’s revenue was essentially flat — as we predicted last month to readers of our Premium Service. The chart below shows revenue for JPM with the one-time gain in Q2 subtracted from earnings.


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Source: JPMorgan


JPM’s efficiency ratio is still in the low 50% range or ten points below the average for Peer Group 1, illustrating the big advantage the largest US bank has compared with the rest of the industry. Provisions for credit expenses were up small sequentially, reflecting the sharp deceleration in bank credit losses since the start of 2024. Provisions are up 125% YOY, but are still not yet a drag on the bank’s strong earnings.


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Source: FFIEC


While the return on JPM’s interest earning assets fell slightly in Q3, the cost of the bank’s liabilities continued to rise, confirmation of our earlier observation that the industry may experience a margin squeeze as the year ends and 2025 begins. The key net interest rate spread has been falling at JPM for the past four quarters, a reflection of the intense competition for assets among large banks.


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Source: JPMorgan


JPM maintained its loan-to-deposits ratio of 55% and saw growth mostly in wholesale loans in Q3 2024. JPM’s asset (-9.6%) and equity (-11%) returns were down significantly vs Q3 2023.  And JPM’s deposit margin slipped from 2.92% a year ago vs 2.6% in Q3 2024. 


Strangely, Reuters reported last week that JPM “shares rose nearly 5% on Friday after profit beat expectations in the third quarter, fueled by gains in investment banking and rising interest payments.”  Yet it is pretty clear from the numbers that JPM’s net interest earnings are under pressure. That said, we still expect equity managers to push JPM and other large cap financials higher as the year ends.


Meanwhile, Wells Fargo’s results were essentially flat to down vs 2023. The bank continues to shrink assets as it downsizes its mortgage servicing portfolio and withdraws from third-party loan purchases. WFC’s loan loss provisions were actually down small vs last year, a striking comparison with JPM. Net loans were down 4% YOY and mortgage servicing rights (MSRs) were down 21% YOY, reflecting natural runoff and also bulk sales of MSRs.


Like JPM, WFC’s net interest rate spread is under pressure, down nearly 20% in the past year from 2.25% in Q3 2023 to 1.8% in Q3 2024. As the bank slowly reduced its position in legacy loans and held-to-maturity securities, it is adding newer securities with higher yields in available-for-sale. In the nine months ended in September 2024, net interest income was down 6% vs the year before.


Suffice to say that bank earnings are likely to be under pressure from the interest rate side of the house in Q4 2024. We will be reviewing Q3 earnings from the other top banks later this week. Questions? Comments? info@rcwhalen.com


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