Retail banks

Overall, it was a very good quarter for the major retail banks (JPMorgan, Bank of America, Citigroup, Wells Fargo and PNC Financial Services Group).There are two explanations for these good results:

A very clear expansion of the net interest margin as these institutions are taking full advantage of the rise in interest rates. Their liquidity is better remunerated and their loans are made at higher rates. They are earning higher interest on their cash and lending at higher rates, but they have not yet increased the interest on their customers' deposits to the extent that rates have risen. In short, this is a really good time for retail banks, but it won't last long. In fact, deposits have started to fall because of this (customers are taking their cash elsewhere). Despite the exceptionally unfavorable environment, borrowers (both consumer and corporate) are clearly still creditworthy and in good shape. All banks have insisted on this point. We also note that provisions for credit defaults are still at very low levels, with Citigroup, as usual, in the role of the bad pupil (but they have a very international portfolio, exposed to riskier markets than the US market). Note that regulation is now very strict with the new CECL (Current Expected Credit Loss) scheme passed in 2020, which in fact obliges banks to anticipate the financial stress of their borrowers even before it occurs. The idea being of course to see the storm coming well in advance. Despite this, credit losses remain very low, a sign that the economy is not (yet) in bad shape.

Investment banks

It is globally not going as well for investment banks (Goldman Sachs, Morgan Stanley, Jefferies), which was of course expected, as we saw with the fall of the markets. The IPO freeze is one of its consequences. As for the current bond crash, it is a major stress on the credit markets, with companies looking to deleverage and build reserves for the coming storm rather than borrowing massively.

Here too there is a "reverse" adjustment effect, but this time in a direction that is unfavorable for investment banks: their revenues are falling but not yet their cost structure.

In this respect, Goldman Sachs is a bit out of place, announcing yet another reorganization that is raising eyebrows, with a merger of "investment banking" and "trading" activities (despite what looks like an obvious conflict of interest) and merger of "asset management" and "consumer banking" activities (which in fact looks like an admission of failure by Marcus, the retail banking department of Goldman Sachs, which proves how difficult it is to mix the genres (retail banking and investment banking are really two separate businesses).

Stock market performance of banking stocks since the beginning of 2022:

Source: Zonebourse

Preparing for the Coming Storm

Overall, all banks seem to be preparing for a difficult near-term future. Officials are voicing fears of a recession. You've certainly heard of Jamie Dimon, who has been particularly explicit on this subject, predicting a recession next year (2023) and making the point that economic agents as a whole are dramatically underestimating the severity of events in Ukraine. That said, his statements of maximum prudence have not yet been followed by action. Once again, provisions for credit defaults are being kept at low levels. Similarly, gross loans remain high, even rising at Bank of America and Wells Fargo & Company.

At all banks, share buybacks have slowed down sharply following the sharp rise in stock market valuations (we can therefore congratulate them on their timing). On the other hand, dividends are obviously maintained.

It should be noted that the accounting profits (net income) of the banks are not always illustrative of the real dynamics for two main reasons:

First of all, to estimate the dynamics of the operations, it is better to look at the pre-tax and pre-provision profit. If we look at the latter, we can see that the big banks have on the whole had an excellent quarter; Secondly, because of the mark-to-market, i.e. the fact of recording the value of assets according to their market price.

As expected, the results were good for the traditional banks and not so good for investment banks, which are suffering from the turmoil on financial markets. One wonders with curiosity if this quarter is not the last ray of sunshine before the coming storm. The market seems to have realized this with the recent declines in September.

However, let's not fall into an overconfident parallel with the 2008 financial crisis, banks are now more supervised, regulated and have much stronger balance sheets.

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