Oct 14 : Wall Street's biggest banks want to ride the AI wave without getting caught in its undertow, as the promise of a lucrative infrastructure boom collides with questions over returns and new security threats.
Executives at the largest US banks this week discussed the risks of AI agents acting on customers' behalf and the uncertainty surrounding demand for the capital and computing power needed to fuel the technology's rapid growth.
"While we are proud of the privileged position we play in the AI investment cycle, no one knows how the demands for capital and compute will evolve as the broader AI ecosystem matures," Goldman CEO David Solomon said on a call with analysts.
"That will only become clearer as technology and markets continue to develop. This uncertainty reinforces the importance of remaining vigilant around the types of activity we finance and how we manage risk."
Citigroup CEO Jane Fraser does not believe that higher rates will slow down the investment in the AI infrastructure. "We're not seeing a slowdown in investment in the broader AI ecosystem. There's simply not enough compute," she said, referring to the processing power needed to develop and run AI models, supported by chips and data centers.
CAPITAL BEHIND THE GREAT AI BUILDOUT
The scale of investment in AI infrastructure is unprecedented. Big Tech has committed billions to building data centers, the backbone of the computing capacity needed to train and run generative AI models.
For Wall Street, the buildout offers a chance to finance one of the biggest investment cycles in decades.
Bank of America CEO Brian Moynihan said the enormous amount of AI capital investment is important for the lender's investment-grade debt and leveraged finance businesses.
Yet the financing opportunity hinges on several unknowns, from whether demand for computing power will keep pace with the industry's ambitious expansion plans to the returns data center projects can generate and the potential for local opposition.
"The AI investment cycle has become a complicated macroeconomic force in its own right," Wells Fargo CEO Charlie Scharf told analysts on a post-earnings call. He added that the buildout presents both opportunities and risks, given the significant leverage used to finance it and upward pressure on prices in some industries and supply chains.
"Having said this, the strength of the economy and the positive forces from these investments have thus far outweighed the potential downside," Scharf said.
Elevated interest rates that stay higher for longer, or rise further, could increase financing costs for data center projects, squeeze returns and make it more expensive for borrowers to service debt.
Morgan Stanley Chief Financial Officer Sharon Yeshaya said in an interview with Reuters that the bank was "very discerning" about the types of risks it was taking. "What you worry about is that peers and other firms allow for a loosening of credit standards, and that's kind of what creates the issue. We're very focused on making sure that we're not involved in those types of transactions." The bank's CEO Ted Pick told analysts the involvement in AI financing is "existential" for Morgan Stanley.
Investors, too, are weighing the economic benefits of the AI boom against the risk of losses on loans to projects that fail to deliver expected returns.
"To the extent that the tech spend is helping drive growth in the overall economy, that is a positive and material to the banks. If the credit exposure is directly related to certain projects like speculative data-center builds, it could lead to issues down the road," said Macrae Sykes, portfolio manager at Gabelli Funds, which holds several bank stocks.
Other investors say that banks are better positioned to manage those risks than some fear, having tightened their risk management practices after the financial crisis.
Dave Ellison, portfolio manager at Hennessy Funds, said banks have not abandoned the lessons of the crisis and are being more careful than investors fear. They are facilitating AI-related financing, but often as arrangers that distribute risk.
RINGFENCING EMERGING AI RISKS
Beyond financing the buildout, banks are deploying AI in hopes of cutting costs and boosting productivity, but the financial payoff remains difficult to quantify.
"As important and dramatic and exciting as this theme is, it takes a long time to really do things that are visible at an institution of our size," JPMorgan CFO Jeremy Barnum said, adding that it is not a surprise that benefits are not yet observable in the bank's quarterly earnings.
Citi's Fraser said the bank is already seeing clear effects of the use of AI, such as developing products at lower cost and up to 40 per cent faster. The use of coding tools has eased development and reduced tech vendor expenses by 30 per cent, she said.
"We are seeing the financial benefits from AI and automation significantly outweigh the investments we've made year to date," Fraser said. The bank is using AI to reduce the volume of manual processes, as well as response time in client service.
Investors are betting on AI to deliver productivity gains across corporate America and valuations of US stocks leave little room for those gains to disappoint.
"If those gains in productivity and lower costs do not arrive by the end of next year, investors will begin to question the hype of AI," Brian Mulberry, chief market strategist at Zacks Investment Management, said.
At the same time, AI agents introduce new security challenges as they gain the ability to act autonomously. The technology is also adding to the threat posed by external cyber attackers.
JPMorgan CEO Jamie Dimon said that the lender is developing tools to navigate agentic AI risk.