On Tuesday, Oct. 13, regulators fined Bank of America (BAC) $1.2 billion. Its shares fell more than 2% after hours. The next morning it reported a miss, and the stock fell nearly 5%. The same day Morgan Stanley (MS) said its wealth unit had its best quarter ever. The AI build-out now drives bank earnings, and it cuts both ways.
Part 1 covered Tuesday's results. JPMorgan (JPM), Goldman Sachs (GS), Morgan Stanley and Citigroup earned more than $30 billion, up about 15%. Revenue rose 11% to more than $113 billion. Jasmine Li's Journal story followed the money to AI. Crisil Coalition Greenwich projects $8.5 billion of AI deal fees worldwide this year, from $3.5 billion last year. Morgan Stanley's Ted Pick called the build-out a “once in a multi-generation change.”
Those deals create new millionaires, and the millionaires need somewhere to put the money. Morgan Stanley's wealth arm took in a record $9.07 billion of revenue and $232 billion of new client assets. Just over half traced back to IPOs. The bank gets paid for the deal, then paid again to manage what the deal created.
The fine and the bond desks
Bank of America was the outlier. Profit fell to $6.9 billion. Sales and trading revenue dropped about 5%, and the quarter missed estimates even without the fine. Regulators said the bank let more than $5 billion of suspicious activity go unreported. One customer alone drew more than 100 compliance cases. A compliance officer's note on how often police asked about that client was one word, “WOW.” The fine cost 17 cents a share. Since its August high the stock is down more than 20%. It steadied at $51.70 on Thursday.
Friday's Heard on the Street, by Telis Demos, widened the lens. At the six biggest banks, revenue from trading bonds, currencies and commodities fell about 4% in the quarter. September's jump in yields did the damage. Stock trading revenue rose more than 40%. The big-bank index was off 2.4% for the week so far, the regional-bank index only 0.6%. PNC (PNC) shows why. Its profit rose to $2.1 billion, or $4.97 a share, and lending income climbed 15% to $4.21 billion. Higher rates hurt the trading desks and help the lenders.
Our read
This is Investments/Risk · IN04. We hold these banks at weight and didn't touch them this week. JPMorgan in 26 books, Goldman in 19, Morgan Stanley in 16, Bank of America in 11, PNC in 9. Big-bank profit now rides on AI deal fees, IPO wealth flows and trading desks, and all three swing with the price of money. September's jump in yields hit the bond desks last quarter. On Wednesday the 10-year touched 5.329% again, so that pressure hasn't gone away. Bank of America expects lending income to grow 8% or more next year, and JPMorgan sees about $10 billion more. So the bank sleeve is two bets wearing one name. Faith-based screens usually exclude conventional banks. The fine is a one-time hit, about 17 cents a share. The 20% slide since August is the part worth watching.
In your own plan, this story lives inside the dividend fund or the value fund in your 403(b). Banks usually sit near the top of those lists. This week's check takes five minutes. Open the fund's holdings page, count the banks in the top ten, and sort them into two kinds. The Wall Street kind earns on deals and trading. The Main Street kind earns on loans. If a dividend fund is really a bank fund, you'd want to know before the next hot inflation report. It's a look we'd be glad to do with you in a review.