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The moment of truth.
Every day you hear talking heads – recession this, inflation that.
But we never really know what’s going on until we get the data.
Lately, it’s been a lot of macroeconomic data that the market has focused on, whether it’s GDP numbers, the FOMC decision, or the CPI print.
Now we get a measuring stick for the “boots on the ground” type of stuff.
Of course – I’m talking about bank earnings.
The major banks typically kick off the earnings seasons, and there are plenty of readthroughs for the real economy. On the back of the banking crisis, and in the face of the recession, all eyes will be on them this quarter to see how well the plumbing of our modern capitalist society is holding up.
For the Big Banks, things are looking good…
This week, in <5 minutes, we’ll cover bank earnings:
The Setup 👉 Into the Prints
JPM 👉 Lighthouse in the Storm
BofA 👉 Steady Enough
Regional Roundup 👉 Summary
The Attack On Savings Accounts 👉 Apple has Entered the Chat
Let’s get started!
1. The Setup 👉 Into the Prints
Banks typically lead earnings season and report ahead of other large companies in major indices. Many look at banks to check exactly what it’s like on the “ground level” for these providers of capital in order to gauge overall economic activity.
Are fewer businesses borrowing in order to fund growth? What about individuals and the health of the consumer? These are all trends that you can unmask when you dive into both the released financial statements as well as commentary provided on the quarterly conference calls.
However, the coming quarters (especially this one) will be the most important since 2020, and before that since 2008. The SVB and regional bank crisis, which I wrote about in-depth here, has caused concerns about a domino effect. This has shifted attention when it comes to combing through earnings.
The top two concerns around SVB, big banks, and regional banks are deposits and the fair market value on-balance sheet debt securities. Remember – it was the combination of a massive debt security loss and a bank run that sent a massive lender into bankruptcy over the course of 3 days.
The narrative around deposits was that the money flowing out of regional banks was going right to the large ones- so the pair trade was long the mega banks and short the regional ones. However, as I wrote about in this piece here, there is a natural erosion of deposit accounts taking place across all banks. Why have your money in a 0.01% interest savings account when you can buy a money market ETF with 4%+ interest? More on this below.
It was also a narrative that the much larger banks were far more prudent in managing their debt security exposures to a rising rate environment. From what we can tell so far from earnings, this definitely looks to be the case. Let’s look at a couple of highlights from certain banks.
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2. JPM 👉 The Lighthouse in the Storm
I’ll always remember tuning into the congressional hearings in the middle of the 2008 crisis and listening to Jamie Dimon. The JPM CEO’s level-headed rationalism was a masterclass on navigating a crisis. And it paid off. After outmaneuvering its competitors through the 2008 crisis, JPM is now the largest bank in America. And they just put up a stellar quarter.
By the Numbers
Raised FY2023 NII expectations to ~$81B up from ~$73bn from the prior quarter
NII ex-markets of $20.9B up 3% QoQ driven by higher rates; NIM of 2.63% (up 16 bps QoQ and 96 bps YoY); Earnings assets yield came in at 4.68%, up 65bps QoQ, with interest-bearing liabilities cost at 2.64% up 60bps QoQ.
End-of-period deposits grew $37B or 2% QoQ; avg. deposit of $2.3T was down 8% YoY (down -3% QoQ)
Average loans of $1.1T were +6% YoY and flat QoQ
Asset & Wealth Management AUM up 9% QoQ and 2% YoY on long-term net inflows of $47B and liquidity net inflows of $93B; In asset mgmt., there was 6.5% long-term asset organic growth driven by fixed income (+$26B) & equities (+$22B);
Standardized CET1 ratio rose 50 bps QoQ to 13.8% vs. mgmt. target of 13% and minimum requirement of 12.5%; SLR increased 30 bps QoQ to 5.9%.
Net investment securities losses of $865M of losses in Corporate
Provision of $2.3B included a $1.1B reserve build
Key Takeaways
This one was a beat across the board. They beat on NII (on the quarter AND the guide), trading & banking, debt & credit card sales, card loans, and asset management flows of +47B, all low keeping expenses low. They even managed a positive deposit growth quarter despite all the talk of migrating deposits to money market funds.
In terms of the macro outlook, we did get a warning. The rationale behind the reserve build was driven by “a deterioration in the weighted-average economic outlook, including updates to the Firm’s macroeconomic scenarios and an increased probability of a moderate recession due to tightening financial conditions.”
3. BofA 👉 Steady Enough
Bank of America is the second largest American bank by assets, at $3.0T, behind only JPM with $3.7T. CEO Brian Moynihan's strategy of pursuing responsible, organic gains can help mitigate the downside and profit before provisions may provide a cushion.
By the Numbers
Average loans flat QoQ (+7% YoY)
NII above estimates ($14.4B vs. $14.0B), up 25% y/y & -1% sequentially, and NIM was 1bp lower vs. expectations at 2.20%, decreasing 2bps QoQ
Sales & Trading up 7% YoY (below est. +19%) driven by FICC (up 30% YoY), partially offset by Equities (down -19% YoY)
Combined spending was up +6% YoY (credit and debit +6%); Risk adjusted margin decreased 18bps QoQ to 8.69% from 9.87% last quarter but declined from 10.40% in 1Q22
CET1 (std.) increased by 20 bps QoQ to 11.4% driven by net income and OCI on AFS debt securities, partially offset by capital distribution; BAC remains above their required minimum of 10.4% (effective October 1st); SLR increased 1bps q/q to 6.0%.
Higher Global Transaction Services revs (+47% YoY)
Deposit growth with avg. balances down 7% YoY (but down -2% QoQ)
Unrealized loss position in the HTM book improved to a still high $99B, down from $108B last quarter – mostly attributed to Treasury and Agency Mortgages
All other revs. net loss of $107M driven by pretax loss on sale of AFS securities
Key Takeaways
This one had all of the trends I mentioned above. BAC beat estimates on higher fees, a lower loss provision, had strong NII, and expenses a bit higher than expected. However, they actually had deposits down 2% QoQ as investors were likely a little soured that BAC wasn’t more of a beneficiary in a “flight to quality” on the deposit front.
When it comes to on-balance sheet loss, the HTM book improved, but is still in a loss position of $99B vs. $108B last quarter.
4. Regional Roundup 👉 Summary
While a lot of the major banks are through their earnings period, when it comes to the regional banks that got hammered in the SVB crisis, some have reported and some have not. Keep your eyes peeled for these next week:
First Republic: April 24
PacWest Bancorp: April 25
Of those that have reported, here are the quick summaries:
Western Alliance (April 18)
Western Alliance popped 24% after a “better than feared” print. While loan and deposit balances were lower (as expected), the margin headwinds appeared manageable, and credit quality remained controlled.
Management announced balance sheet repositioning plans (expects to sell approximately $6 billion in loans in 2023) to improve both capital (mid-80% loan-to-deposit ratio in the near-to-medium term) and liquidity levels that should be achievable. They believe they can incrementally build capital over the near term that should allow the CET1 to reach in excess of 10% in 2Q23.
Deposits: Deposits declined 11.3% sequentially to $47.6 billion with lower NIB demand, savings, and money market balances as drivers
Debt securities: Period-end HFI loans declined 10.5% sequentially to $46.4 billion as $6 billion in loans were reclassified to HFS as part of the balance sheet repositioning strategy.
Zions Bancorp (April 19)
Much more muted reaction at ZION. Core bank results were “fine” and reflected much less favorable spread revenue dynamics and higher-than-expected expenses. Credit metrics continued to be relatively clean, though management remained conservative with a modest reserve build. The updated fundamental outlook suggests additional margin and net interest income headwinds in the near term given the rate environment and inverted yield curve.
Deposits: Deposit balances declined 3.4% sequentially
Comerica (April 20)
Fundamental trends were tolerable given the difficult macro and funding environment. Moving forward, stabilizing funding trends and stronger loan growth may be drivers to higher net interest income after a reset lower.
Deposits: Average deposits are now assumed to be down 12% to 14% for 2023 which compares to 7% to 8% previously.
5. The Attack On Savings Accounts 👉 Apple has Entered the Chat
By now, you’re starting to see a common theme: deposits are down as a result of much more attractive alternatives. Well…the alternatives just got that much more attractive and accessible.
On Monday, Apple launched its own high-yield savings account, offering a 4.15% APY. Apple Card users can choose to grow their Daily Cash rewards with a Savings account from Goldman Sachs, which offers a high-yield APY of 4.15%— a rate that’s more than 10 times the national average.
With no fees, no minimum deposits, and no minimum balance requirements, users can easily set up and manage their Savings account directly from Apple Card in Wallet
Once a Savings account is set up, all future Daily Cash earned by the user will be automatically deposited into the account. The Daily Cash destination can also be changed at any time, and there’s no limit on how much Daily Cash users can earn.
To build on their savings even further, users can deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance.
What this does is make it extremely easy, by removing the friction of juggling accounts, by simply linking a banking account. I think this is going to be a massive success and banks need to watch out.
Wrapping Up…
In my note last week, I flippantly wrote that the banking crisis is over and we can move on now. While there are part-truths in that, we are still not completely out of the woods when it comes to the ripple effects that will occur in the overall economy as a result of yet another revaluation of lending standards and liquidity requirements.
Coming out of 2008 made our entire financial economy much more resilient, and I believe that is beginning to show. It is those lenders on the fringe that are still on the bubble. The performance of Western Alliance post-earnings was very encouraging to the regionals overall, but we still have two major players reporting next week: PacWest and First Republic.
Oh…and we also have megacap earnings next week, which I will cover in depth.
Thanks for reading and be sure to check out next week’s tech earnings breakdown.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
