Read-Throughs From Day 1 of Bank Earnings Season

Read-Throughs from Day 1

Day 1 of 3Q23 earnings season. Earnings season kicked off Friday with releases from several bellwether financials: JP Morgan Chase, Citigroup, Wells Fargo, and PNC among banks as well as BlackRock. In this report we review read-throughs for the financials based on this first tranche of data and management commentary.

Deposit flows and repricing. Like last quarter, the large Day 1 reporters saw non-interest-bearing deposits continue to decline, though generally at a slowing pace, and generally expressed the expectation that aggregate deposit betas will continue to grind higher in 2024 even absent further rate hikes (though the belief, supported by futures markets, that we are at or near the top for Fed Funds, supports greater confidence in forecasting the trajectory of deposit betas).

Basel III Endgame. The three G-SIBs all stressed the heavy drag on ROE from pending capital rules, if implemented as proposed, while expressing various degrees of optimism regarding prospects for modification. Absent significant modification, current long term ROE targets will likely need to be revised down even with mitigating actions such as repricing where possible and exiting certain businesses altogether. Notably, PNC CEO Bill Demchak expressed interest in acquiring assets the G-SIBs may seek to shed as they adapt.

AI and banking: AI rated at least a passing mention on most of the calls, but JP Morgan Chase CEO Jamie Dimon was particularly vocal about the opportunities it creates for a bank of JPM’s scale: “Banks have an extraordinary amount of proprietary data in addition to when you do like a large language model, that's public data, looking at everything on the Internet or everything that's ever been published or something like that. But AI is a extraordinarily good tool to use. We just put a woman who's running it at our table. So it's data analytics, AI, et cetera. And there are multiple types of AI. So we use AI for risk, fraud, marketing, prospecting. And the management team's getting better and better at saying how can we use the data to do a better job to reduce hours, to serve clients better, to have a salesperson have co-pilots so they know – widen the client's coin or something like that. And so, we simply have to do it. Does it create opportunity for disruptors to come in? Yeah, of course. That's always been true with technology. But we'll be quite good at it.”

Resiliency as a secular trend. Citigroup CEO Jane Fraser offered an interesting comment on the rise of resiliency as a secular trend in corporate strategy and investment. “The multinational client is on a long-term trend of building resiliency, be it because of green, be it because of geopolitics, be it because of regulatory, whatever the different reasons may be, and there are multiple, they're having to build resiliency into supply chains, into their own operations as they operate around the world, where the bank is absolutely there for them.”

Investment banking fees tick up. For the four large reporters thus far, total investment banking fees rose 6% year-over-year and 21% on a linked quarter basis. Results were especially strong at Citigroup and Wells Fargo, both of which posted gains in excess of 30% both sequentially and year-over-year. Strength in debt underwriting offset weakness in equity underwriting, while M&A revenues saw a big jump from the especially weak Q2 levels, though still down 18% year-over-year.

Citigroup CEO Jane Fraser suggested that the modest rebound reflects the gradual adjustment to higher interest rates and their impact on asset prices. “Q3 is the seventh quarter of the current IB downturn. So, since 2000, downturns have tended not to last longer than seven quarters because that's often how long it takes for pricing expectations to fully adjust to new realities. And we're starting to see that particularly in the debt capital markets, investment grade market, where the expectation of no longer how high but how long for rates, we've seen clients who get off the sidelines and just bite the bullet and get into the debt capital markets in a more meaningful way and no longer waiting on that.”

Fraser also offered the most optimistic take on the outlook for M&A: “And then in M&A, a healthy M&A sell side pipeline. A lot of companies with their industries is transforming are really wanting to think big. I think we'll see that unlocking when sentiment improves further, companies do accept the new pricing reality, which will be helped by a rebound in equity markets.”

JP Morgan Chase CFO Jeremy Barnum remained mildly optimistic on underwriting but less so on M&A, stating “our banking team is a little bit more optimistic than they were last quarter. So it feels to me like a little bit of a slow grind with some positive momentum but obviously significant uncertainty in the outlook and some structural headwinds given lower levels of announced M&A and some regulatory headwinds on that side.”

Wells Fargo CFO Mike Santomassimo cited the recent increase in volatility as a driver of Wells’ strong results but also noted the bank’s continuing investment in growth, “we've just been methodically investing in the capabilities with a focus on supporting our core clients… so businesses like FX and rates and just – it's sort of methodically sort of adding people in a couple slots or improving technology.”

Figure 1: Total investment banking fees

Source: FactSet

Figure 2: Debt underwriting fees

Source: FactSet

Figure 3: Equity underwriting fees

Source: FactSet

Figure 4: Advisory fees

Source: FactSet

Card spending holding up but credit weakening.  Aggregate credit card spend volume was flat linked quarter but up 8% year-over-year for the three big card lenders reporting Friday. Delinquencies and charge-offs continued to grind higher, however, and results for Citigroup’s Retail Services portfolio suggest that the less-well-off consumer is playing its traditional role as the canary in the coal mine.

Figure 5: Credit card transaction volume

Source: FactSet

Figure 6: Credit card receivables 90+ days past due

Source: FactSet

Figure 7: Credit card net charge-off rate

Source: FactSet

September master trust data offers insight ahead of earnings reports. As of this writing, we have September master trust data for Bank of America and Discover, neither of which have yet reported quarterly results. The master trust data suggest that the card metrics will be roughly in line with what we saw Friday at other national card lenders. 

At Discover, delinquencies rose 22bps from June to 1.63%, and the July-September 3-month average NCOs of 1.90% was up 11bps from the April-June average. At Bank of America, delinquencies were up 4bps from June to 1.30%, and the 3-month average NCOs of 2.03% up 9bps from the 2Q monthly average.

Figure 8: Discover master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 9: Bank of America master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Mortgage originations declined sharply as the 10-year yield hit new cyclical highs during the quarter. 

Figure 10: Mortgage origination volume (retail)

Source: FactSet

In auto finance, origination volumes show two banks going in different direction, with JP Morgan Chase volumes up 36% year-over-year while Wells Fargo’s volume declined by 24%. JPM is the contrarian here, picking up share as other lenders, bank and non-bank alike, pull their horns in. 

Figure 11: Auto origination volume

Source: FactSet

Branch closures continue, but selective de novo branching still happening. JP Morgan Chase’s branch total is higher year-over-year due to the First Republic acquisition, but organically, all four reporters have been closing branches. The reasons are well known but what gets less attention, while saying a lot about the future of physical branches, is that even G-SIBs are still engaged, albeit at small scale, in de novo branching. Wells Fargo has been among the more aggressive in shrinking its branch footprint, yet on the earnings call, CEO Charlie Scharf stated that “Branches continue to play an important role in the way we serve our customers, and we continue to optimize our network. But we also look at targeted expansions in markets where we see opportunities for our franchise. Last week we announced we're expanding our branch network in Chicago where we only have seven branches today.”

Figure 12: Total retail branches

Source: FactSet

Bank Stocks Underperform Again

Banks underperform in final week before earnings season. The KBW Bank Index (BKX) rose 0.14 last week, underperforming the S&P by 31bps, while the KBW Regional Bank Index (KRX) fell 2.19% for the week, underperforming by 264bps.  

Figure 13: The KBW Bank Index 

Source: FactSet

Figure 14: The KBW Regional Bank Index 

Source: FactSet

Interest Rates

Bear steepener reverses slightly. The bear steepener took a breather last week as the 10-year yield fell 16bps to 4.63%. The 2 year – 10 year spread widened by 12bps to -41bps. 

Figure 15: The bear steepener continues to flatten the curve

Source: FactSet

Figure 16: The 2-10 inversion increased by 12bps last week to -41bps

Source: FactSet

Fed Funds futures take another slight dovish turn. Fed Funds futures didn’t move much last week, but for the second time in the past three weeks moved in a dovish direction. Not by much, however; each month’s rate came in by 2-4bps and the implied timing of the first rate cut remains the June 12 FOMC meeting.   

Figure 17: Fed Funds futures took another slight dovish turn last week

Source: FactSet

Figure 18: Fed Funds Futures imply the first rate cut has moved up to the June 12, 2024 FOMC meeting

Source: FactSet

Weekly Federal Reserve Balances

Federal Reserve borrowings resume dip. Total bank borrowings (BTFP combined with the Discount Window) rose by 0.9% last week to $111.5 billion, another post-April high. Money market fund balances were essentially flat at $5.7 trillion, easing 3bps for the week. 

Figure 19: Federal Reserve balances

Source: FactSet

Figure 20: Bank Term Funding Program usage reached another new peak last week

Source: FactSet

Figure 21: Money Market Fund assets declined by 3 bps last week

Source: FactSet

Figure 22: Large cap bank performance and valuation

Source: FactSet

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.