Big banks shine in Q4, but risks loom ahead

It's a good day to be a big bank. J.P. Morgan, Citigroup, Goldman Sachs, and Wells Fargo all posted strong profits during the fourth quarter thanks to a resurgence in deal making and investment banking strength. Joining us now to dive into the results, we've got Chris Whalen, who is the Whalen Global Advisors Chairman. Chris, good to have you here with us in studio. Pleasure, good morning. You gave us a report card for this morning's earnings results, and we're showing it for our viewers here. The only name that earned an A was J.P. Morgan. Why was that? Stability and predictability. They deliver quarter after quarter. You only saw 1% loan growth, which I thought was kind of interesting. And to me, that says that Jamie Dimon's being picky about the assets that he puts on the book. J.P. Morgan's only half bank, remember. The other half's the investment side. But overall, good quarter. A little bit of a credit build, so we're gonna start worrying about credit, I think, in 2025. That was supposed to be part of the narrative earlier this year, as you know, but it didn't happen. So banks ran like crazy. The average in the bank index we published was 45% through the third week in November, but then they started giving it back. So I think you're gonna see financials, even with these good results, continue to give it back simply because people are worried about the economy. Not consumers, but the commercial side. Commercial real estate, and particularly corporate debt. You know, we have corporate debt spreads that are as tight as they've been in years, and yet bankruptcies are going up dramatically. So there's these weird discontinuities, I think, in the data set when you look at the industry right now. Good earnings, killing it in terms of capital markets, both debt and equity underwriting in the fourth quarter, and yet there's this big question mark, which is where's the recession? Everybody was postured, the Fed was postured for a recession, didn't happen. Do you think banks can continue with this momentum here before we get to some of your other ratings here? But can they continue with this momentum if the Fed doesn't cut further this year? No, I think that's the other part. One worry is credit, the other is maybe today's rates are where we're gonna be living, particularly as you see long-term rates extending. That's the really interesting thing that's going on now. Imagine if Fed funds stays at four, but we end up with a long bond over five, and particularly the 10-year. Imagine if that gets close to five. What that will tell us is that the mark-to-market problems that many banks still have are not going away. But on the other hand, the loan side has pretty much repriced since COVID. So that's the good news. Two years ago, if I had done a mark-to-market for you on Bank of America, it was pretty ugly. The security side still hasn't moved much because they don't wanna sell those bonds. The average yield, Bank of America is down in the twos. So if you look at the bond market today, where are those securities trading? 80, they don't wanna sell those. But the loan side has been okay. Bank of America, the rest of them have been growing. So it's kind of a mixed picture is what I'm saying. As we think about many of these banks, and maybe we can toss up the grades that you're giving them as well, who do you believe is best positioned if we were to see something that Jamie Dimon talked about in deregulation and how much these banks are relying on that as well for future deal-making to come forward? And who also might be relying on this to deploy some of their own capital towards some of the smaller or regional banks as well if there are opportunities that present themselves? If we're talking about M&A, I think you're really talking about banks outside of the top 10. I cannot imagine the Fed or the OCC allowing any of those banks to merge. U.S. Bancorp did that very large transaction with Bank of California. They're done for a while. They have to absorb that. It's good for the bank, by the way. But go down the list, who else is gonna be allowed to make an acquisition? Morgan Stanley could. Goldman could potentially. But I really think for the rest of them, you know, Wells Fargo, imagine if they get let out of jail during the Trump administration. They then have to make a decision. They've been shrinking that bank for the past four years. They're continuing to shrink. What do you think of Wells Fargo? You had a B, I believe it was a B minus, I wanna say, for Wells Fargo this past quarter. Shares are up 4.5%. It looks like the street is at least encouraged B, excuse me, not B minus. Why did it fall a little bit short in your eyes? There's nothing going on. I mean, I do a lot of work in the mortgage business. They are shrinking their book. JP Morgan is now the largest servicer in the U.S., not Wells Fargo. Wells used to have a third market share in residential mortgages. But they have made a conscious decision to get out of that, get out of areas of investment management, offshore, for example. They completely jettisoned that business. So I think Wells has to have a bit of an epiphany that says, do we wanna keep shrinking? Do we really wanna get this bank down to say below a trillion dollars? I don't think investors want that. Or if we're gonna grow again, where do we grow? Do we just focus on domestic? Do we stay away from mortgage? What would make the most sense? I think it was a shame that they were driven out of mortgage by the regulators. I really do. I think that was a mistake. They saved the U.S. mortgage market after 2008, okay? So we need to have a more level, less volatile regulatory environment, whether there's a Republican or a Democrat in the White House. To have banks have to manage their business based on whether or not Elizabeth Warren is gonna attack them or not is absurd. You can't run a business that way. All right, well, Chris, always great to get your insight. Wish we had more time with you. Thank you so much for taking the time to join us here. My pleasure. Have a great day. You too.