25.08.2023 21:19:21
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Big Bank Story - How U.S. Banking Behemoths Fared In Q2
(RTTNews) - Another earnings season has just passed by. Though the euphoria from an AI-powered rally in the tech space has limited the pain of Fed's unprecedented monetary policy aggressiveness as well as the shock of the unforeseen banking crisis that followed, banking sector resilience remains a dominant investor concern. An analysis of the performance of big banks, within the overall macroeconomic context is therefore of quite contemporary relevance.
The macro context
The second quarter of 2023 was a keenly watched period for the banking sector in the U.S., coming as it were, after a quarter that witnessed an unforeseen and turbulent banking crisis. The unprecedent stress in the banking sector had triggered the closure of Silicon Valley Bank and Signature Bank in the first quarter and First Republic Bank early in the second quarter.
Despite high interest rates being blamed for the banking crisis of March, the Fed again raised rates by 25 basis points in May. However, in the dilemma between inflation combat and growth, the Fed opted for a pause in its review in June. Nevertheless, during the second quarter, U.S. ten-year bond yields hardened 8.3 percent. On the contrary, yields had eased 9.1 percent during the first quarter.
Even though the Fed's successive interest rate hikes and quantitative tightening renewed fears of a recession and hard landing for the economy, the U.S. economy grew by 2.6 percent in the second quarter. The first quarter of 2023 and the second quarter of 2022 had both recorded GDP growth of 1.8 percent only.
Annual headline inflation declined steadily from 5 percent in March 2023 to 4.9 percent in April, to 4.1 percent in May and to 3 percent in June.
Unemployment rate edged up to 3.6 percent by June, from 3.5 percent at the end of March 2023.
The equity market's confidence in the banking sector was also renewed in the second quarter. The Dow Jones Banks Index (DJUSBK) comprising 49 banks rebounded in the second quarter, gaining 4.5 percent, versus the decline of more than 13 percent in the first quarter. Sentiment was less pronounced in the broader market, with the Dow Jones Industrial Average (DJI) only bettering gains to 3.4 percent, from 0.38 percent in the first quarter.
Depositors' confidence in the U.S. banking system also improved over the course of the second quarter, as evidenced by the modest increase in the level of total deposits during the period. Deposits of commercial banks in the U.S. which dropped from $17.41 trillion at the end of March to $17.26 trillion by April, recovered to $17.28 trillion by the end of May and to $17.32 trillion by the end of June.
Higher interest rates and a rebound in the U.S. economy were the dominant macroeconomic themes in the second quarter of 2023.
Double click on Q2 financial results
Here is the second-quarter performance of the top banks in the U.S. The universe of our analysis comprises 6 banks with an asset size of more than $1 trillion as on 30.06.2023, viz JP Morgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS).
Amidst the overall operating conditions, the change to bottom-line ranged from JP Morgan Chase's 67.3 percent profit growth to Goldman Sachs' 58.5 percent decline in profit. The First Republic Bank acquisition aided JP Morgan's strong show. Goldman Sachs attributed the drop in net income to the decline in market-making and investment banking activity levels. Wells Fargo recorded a 64.8 percent jump in net income contributed by higher net interest income and non-interest income. Bank of America also added 18.6 percent to profit during the quarter, helped by a 14 percent growth in Net Interest Income. Citigroup reported net income that was lower by 38.4 percent primarily driven by the higher expenses and the higher cost of credit, as well as lower revenues. Non-interest revenues dropped by 28 percent. Morgan Stanley also reported a 12.4 percent decline in earnings amidst an 8-percent rise in non-interest expense and a 12-percent dip in Net Interest Income. Expenses for the quarter included severance costs associated with the employee action in May.
On the revenue front also, it was a mixed picture for the big lenders. JPMorgan Chase recorded a growth of 34.5 percent as revenues surged to $41.3 billion, from $30.7 billion in the year-ago quarter, helped by the higher rates as well as the addition of $4.1 billion from the acquisition of First Republic Bank. Revenue from First Republic included an estimated bargain purchase gain of $2.7 billion. Wells Fargo added more than 20 percent to its revenue in the second quarter helped by higher net interest income and non-interest income. Bank of America recorded a revenue growth of more than 11 percent. Morgan Stanley also added 2.5 percent to its revenues versus the year-ago quarter. Citigroup recorded a 1-percent dip in revenues. For Goldman Sachs, the revenue dip was more than 8 percent caused by a 20-percent drop in investment banking revenues and a 11-percent decline in market making revenues.
Net Interest Income or the excess of interest received over interest paid, increased as the Fed's rate hikes impacted bank balance sheets characterized by stable loan portfolio and lackluster deposit growth. JP Morgan grew its NII by 44 percent followed by Wells Fargo that added 29 percent. Citigroup's NII growth was 16 percent whereas Bank of America recorded NII growth close to 14 percent. Only Morgan Stanley and Goldman Sachs recorded a drop in NII during the second quarter. NII of Morgan Stanley declined 11.9 percent whereas Goldman Sachs saw its NII diminish by 2.9 percent.
It was a mixed performance for the big banks in respect of non-interest revenues as well. JP Morgan Chase added 25.3 percent whereas Bank of America and Wells Fargo, both reported growth of close to 8 percent. Morgan Stanley followed with a growth of 5.5 percent. Non-interest revenues of Goldman Sachs dropped more than 9 percent as both investment banking and market making revenues slumped.
Challenges to credit quality were aggravated during the quarter. Wells Fargo suffered close to 200 percent jump in provision for credit losses, on increased commercial real estate loans, primarily office loans, as well as increases in credit card loan balances. JP Morgan's provision for credit losses increased by 163 percent amidst a $1.2 billion hit associated with the First Republic acquisition. Bank of America had provided for 115 percent increase primarily due to credit card loan growth and asset quality. Morgan Stanley recorded provision for credit losses that was almost 60 percent higher than the levels in the same quarter last year due to credit deterioration in commercial real estate lending, mainly in the office sector. Citigroup's provision for credit losses increased 43 percent year-on-year driven by higher net credit losses in branded cards and retail services. Goldman Sachs's provision was 7.8 percent lower than last year as provisions related to the commercial real estate portfolio were partially offset by a reserve reduction related to the repayment of a term deposit with First Republic.
Deposit growth at the largest U.S. lenders also revealed a mixed position. Bank of America which boasts of a deposit portfolio of more than $3 trillion witnessed a decline of 1.7 percent during the quarter. JP Morgan Chase, with a deposit base of $2.4 trillion added close to 1 percent, helped by the acquisition of First Republic Bank. Wells Fargo shed a little more than 1 percent in deposits during the quarter. Citigroup's end-of-period deposits declined less than 1 percent. Goldman Sachs, which commands a deposit portfolio of less than $400 billion, saw its deposits rise more than 6 percent during the quarter. Morgan Stanley also saw its deposits edge higher.
The recent downgrade by S&P Global of a few regional banks in the U.S. citing high exposure to commercial real estate, constrained profitability, deposit outflows etc., has again spotlighted the health of the banking sector. The downgrade follows similar action by Moody's and warnings by Fitch Ratings.
Though higher interest rates have translated into higher revenues for banks, it could herald delinquencies in the asset portfolio that requires careful monitoring and scrutiny. The interest rate risk that a high interest rate regime can entail also warrants careful monitoring and risk mitigation.
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Aktien in diesem Artikel
Bank of America Corp. | 43,64 | -0,29% | |
Citigroup Inc. | 64,82 | -0,08% | |
Goldman Sachs | 550,60 | -0,24% | |
JPMorgan Chase & Co. | 230,05 | 0,61% | |
Morgan Stanley | 124,48 | -0,50% | |
Wells Fargo & Co. | 69,57 | -0,37% |