America’s big money center banks kick of second quarter earnings next week. Core commercial and consumer banking franchises are expected to show improved profitability. However, there is continued weakness in investment banking and concerns are rising over the banking sector’s exposure to commercial real estate, asset quality is being scrutinized in earnings. Signs of asset quality deterioration are a risk. JPMorgan Chase (JPM), Citigroup (C), BlackRock (BLK), State Street (SST) and Wells Fargo (WFC) reporting Q2 results on Friday July 14. Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley are all scheduled to report on July 18.
Bank Earnings Schedule
- JPMorgan Chase (JPM), Citigroup (C), BlackRock (BLK), State Street (SST) and Wells Fargo (WFC) reporting Q2 results on Friday July 14
- Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley are all scheduled to report on July 18, 2023
First Quarter Bank Earnings Previews
- What to Expect from Wells Fargo Earnings
- What to Expect from Citigroup Earnings
- What to Expect from JPMorgan Earnings
The Federal Reserve announced the 23 largest US lenders had passed the Central Banks Stress Tests. The banks showed they can withstand a severe global recession and turmoil in real estate markets. The Fed released the hypothetical scenarios for its annual bank stress tests back in March before the New York and California regional bank turmoil. The 23 banks were tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets.
Higher Interest Rates Increase Revenue …. But at a Cost
Understandably there is a crisis of confidence in regional banks sparked off the collapse of Silicon Valley Bank and Signature Bank in March. The absorption of Credit Suisse by UBS in Switzerland also sent shockwaves around the sector. Since then, we have seen opportunities unfold for some banks, how will they translate into their earnings?
We also have banks off the leash with respect to capital plans and payouts after passing the Federal Reserve’s stress tests that some rightly criticize as inadequately testing for today’s shocks. Rightly so because it was done prior to the collapse of the regional banks.
We warned at the end of last year higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
“US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses… Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms … The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks and plunged $73.6 billion at smaller commercial banks over the same period.”April 7 – Bloomberg (Alexandre Tanzi)
Major tightening of real estate lending unfolding
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years.
- Loans offered by banks dropped slightly in the last week of June, the Federal Reserve’s data showed, ahead of bank earnings.
- Bank credit fell by $23 billion in the week ending June 28 on a seasonally adjusted basis, ending the month at $17.3 trillion, data released Friday showed.
- Lending has slowed down from the all-time peak of $17.6 trillion seen in the beginning of the year, but it still remains adequate, likely fueling some inflation.
- Commercial and industrial lending fell by $8 billion.
With concerns rising over the banking sector’s exposure to commercial real estate, asset quality is being scrutinized in earnings. Signs of asset quality deterioration are a risk.
Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
JPMorgan (JPM US), Citigroup (C US), Wells Fargo (WFC US) and BlackRock (BLK US) could give a more comprehensive picture of how empty downtown office buildings are hitting real estate lenders and investors. Management could also discuss how they are dealing with rising competition for deposits.
How was it all a Surprise to Bankers, Regulators and Markets?
Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks continued to grow their loan books, particularly commercial and industrial and credit-card loans.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically on activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices.
What Analysts Are Watching:
- Net interest Margin: This comes down to what the bank lends at and how they fund it. The yield curve has flattened which means the spread between short-term interest rates and long-term rates has narrowed. This lowers the margin banks make in the fixed interest and lending markets. It will also differ between the top and bottom tier banks. Analysts see NII growth continuing to receive a boost from last year’s rate hikes, but that may not last after the Fed signaled a slowdown in rate increases could be near.
- Trading Volumes: Trading volumes have fallen away in stock and fixed interest markets as many investors stayed on the sidelines due to volatility and losses. Events like the FTX fraud have also caused losses and hurt sentiment with financial markets unravelling.
- Investment Banking: Fee income has also collapsed; IPO activity was the lowest since the 1970’s. Likewise mergers and acquisition activity has dried up. With that so have all those big fees.
- Credit Quality: How much have the banks provided for losses and what are their expectations. Accounting for expected credit losses and how banks manage loan-loss provisions gives an insight where banks think credit quality is heading in a new downward cycle.
- Unrealized Losses on Investment Securities: How large are the losses, have losses been taken and are they hedged? This will affect ROE and EPS. Simply the value of assets held has been diminished, but by how much?
- Loan Growth: How strong is loan growth and in what areas? What quality is that debt? Does loan growth build in higher-yielding segments alongside increasing commercial utilization rates, or cautious corporates and a weaker consumer sees loan growth come to a grinding halt?
Last Quarter’s Major Bank Earnings:
Source: JPM, WFC, PNC, C. GS, BAC, MS, WSJ
From the TradersCommunity Research Desk