What We’re Watching. Bank earnings season hasn’t completely ended, but conference season kicked off this week with the Gulf South conference in New Orleans. The bank conference calendar is crowded in May, but other highlights include the SLOOS release next week, Congressional hearings featuring prudential regulators on May 15-16, and the JP Morgan Chase Investor Day on May 20.
Figure 1: As Earnings Season Winds Down, Conference Season Has Already Begun
A Timex earnings season. Like the old Timex ad slogan, banks took a licking and kept on ticking in 1Q24. The higher-longer expectations continued to drift yet higher and yet longer and noninterest-bearing deposits continued to drift down. As shown in Figure 2, they could continue to do so at this pace for several more quarters before reaching the range that prevailed before ZIRP. Yet while NIMs declined overall, a growing cohort of banks—one quarter of those in the superregional universe used in Figure 3—are already seeing their NIMs bottom out and begin to rise, and that number looks set to rise as we move through 2024.
Figure 2: Noninterest-bearing deposits remain well above pre-GFC norms
Figure 3: NIMs remain under pressure but are beginning to turn up at more banks
Rising capital, mean-reversion in credit. As Figures 4 and 5 show, while CRE and credit cards have been driving credit metrics back toward historical norms from the unsustainable low COVID-era levels, Figure 6 shows that capital levels are high and rising. If we do wind up seeing a full credit cycle (rather than mere mean reversion), then banks will enter it with much a much better ability to absorb write-offs than in prior cycles.
Figure 4: Net Charge-Offs
Figure 5: Nonperforming asset levels rising from unsustainably low levels
Figure 6: Bank capital levels are high and rising
Branch closures slowing for many large banks. Branch totals disclosed by the largest banks suggest that for many, branch closures are decelerating. How long that deceleration lasts is anyone’s guess, of course, and if M&A were to pick up then, as illustrated in Figure 8, that would tend to reaccelerate closures. At the same time, we can’t shake the feeling that the contra-trend of more banks announcing de novo branch plans may be more strategically significant than is generally acknowledged.
Figure 7: Total Retail Branches
Figure 8: The lone and level sands stretch far away (NYC, 2024)
Banks trade up. The KBW Bank Index (BKX) and the KBW Regional Bank Index (KRX) both rose last week, with the BKX up 2.6% and the KRX up 1.4%, though both underperformed the S&P 500 (the BKX by just 7bps but the KRX by 123 bps).
Figure 9: The KBW Bank Index
Figure 10: The KBW Regional Bank Index
Bear steepener remains stubbornly in place. Last week the 10 year yield rose 6bps to 4.70%. The 2 year – 10 year spread narrowed by 3bps to -33bps.
Figure 11: The bear steepener remains in place
Figure 12: The 2-10 inversion narrowed by 3bps last week to -33bps
Fed cuts continue to drift into the future. The implied timing of the first rate cut, which until very recently was June, has now moved out to the September 18 FOMC meeting. As shown in Figure 14, futures now imply a bottoming of rates around 4.25%, versus 3% a year ago; 125bps of once-anticipated easing has simply vanished.
Figure 13: Fed Funds Futures imply the only cut in 2024 will be at the September 18 FOMC meeting
Figure 14: Fed Funds Futures imply a 4Q25 average daily rate of 4.45%, up 147bps in the past year
Figure 15: Large Cap Bank Performance and Valuation
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