Zhitong Finance APP learned that after Goldman Sachs (GS.US) disclosed second-quarter revenue and profit data that exceeded market expectations, the stock price rose by more than 4%, leading the U.S. banking sector. As of the close of July 18 local time, Goldman Sachs closed up 2.51%, Morgan Stanley (MS.US) closed up 1.04%. Among the "six major banks in the United States", only JPMorgan Chase (JPM.US) closed down 1.03%. The next day, the six major U.S. banks continued to rise, with Goldman Sachs closing up 5.57%, and MFC closing up 2.48%.
Table 1
Judging from the above stock price performance, although these six large banks have seen double-digit performance declines in net profits, the market seems to be satisfied with the performance of the six major industries in the United States. Among them, JPMorgan Chase, Morgan Stanley, Wells Fargo (WFC.US) and Bank of America (BAC.US) did not meet analysts' expectations. This article will discuss whether these bank stocks are worth investing in when considering risks such as slowdowns in loans, recessions, etc.
The overall performance of the six major U.S. banks declined, Goldman Sachs and Citigroup (C.US) "winds miserably"
As can be seen from Table 2, JPMorgan Chase's net profit fell about 28% to US$8.65 billion in the second quarter, equivalent to earnings per share of US$2.76, lower than the market's expectations of US$2.88; Morgan Stanley's net profit fell nearly 30% to US$2.50 billion; Wells Fargo's net profit fell 48% to US$3.1 billion in the second quarter; Bank of America's net profit fell 32% to US$6.25 billion, with earnings per share of US$0.73, lower than market expectations.
Table 2
Although the overall performance of the six major U.S. banks generally declined, Goldman Sachs and Citi's performance still exceeded market expectations. Among them, Citi's revenue in the second quarter was US$19.64 billion, an increase of about 11% year-on-year, exceeding the market's expectations of US$18.098 billion; net profit fell by 27% year-on-year to US$4.55 billion, but still exceeding the market's expectations of US$3.369 billion. It is understood that the reason why the group's second-quarter performance exceeded expectations was mainly due to large amounts of funds brought by foreign exchange, commodities and interest rate transactions, as well as cross-border corporate capital transactions. In addition, Goldman Sachs' second quarter revenue was US$11.86 billion, down about 23% year-on-year, but it was still better than the market's expectations of US$10.86 billion; profit fell 48% year-on-year to US$2.79 billion, equivalent to earnings per share of US$7.73, down 49% year-on-year, and US$1.04 higher than the market's expectations of US$6.69.
In addition to the above key financial indicators, as shown in Table 3, investment bank revenue, loan loss provision, transaction revenue, net interest revenue and other data are also highlights of the second quarter financial reports of the six major U.S. banks. What is particularly noteworthy about is that the investment banking business revenue of these leading banks, such as , was almost halfway through the second quarter, becoming an important factor that drags down banks' profits in the quarter. Among them, the related businesses of Bank of America, Goldman Sachs and Citi all fell by more than 40%, while Morgan Stanley and Morgan Stanley even exceeded 50%. This is mainly attributed to the interest rate hike measures taken to fight inflation and the continued heating of risk aversion sentiment, which caused the issuance of stocks and bonds to cool down, and the activity of mergers and acquisitions in the capital market has dropped significantly. data shows that in the first half of this year, the global stock capital market IPO scale was US$263.8 billion, a year-on-year decrease of nearly 69%; the transaction volume of mergers and acquisitions in the second quarter fell to US$1 trillion, a year-on-year decrease of 25.5 percentage points.
Table 3
In addition, the indicator of loan loss provisions has also attracted market attention, but in fact, is not so much that the sharp increase in loan loss provisions has led to a sharp decline in profits of the above-mentioned banks, but rather that the bank's profits in 2021 were actually exaggerated, because the bank released a large amount of credit loss provisions reserved in 2020, which had a positive impact on profits. It is understood that generally speaking, when the economic situation is bad and the quality of loans becomes worse, banks need to provide some funds to deal with some credit losses. And when there is no actual loss, these reserves are released into profits. For example: In the second quarter of 2020, JPMorgan raised its credit loss reserves by $8.9 billion and released $3 billion in the second quarter of 2021. But in the second quarter of 2022, as banks prepare for the slowdown, they began to increase credit losses provisions. In the second quarter of 2022, JPMorgan added $400 million in provisions. Therefore, a sharp decline in profits caused by increased loan loss provisions cannot be used as a reason for poor performance in the six major U.S. industries.
Especially with the outstanding performance of these top banks' net interest and trading businesses, it is understood that the Federal Reserve's interest rate hike has brought growth in net interest income to major banks. JPMorgan Chase's net interest increased by 19% in the second quarter to US$15.2 billion, and Wells Fargo's net interest income was US$10.198 billion, far exceeding US$8.8 billion in the same period last year. Bank of America said on Monday that net interest income soared 22% to $12.4 billion in the second quarter due to rising interest rates and growing loans. Its chief financial officer Alastair Borthwick predicts that the figure could increase by $900 million or $1 billion in the third quarter as the Federal Reserve continues to raise federal funds rates, and at least that much will increase in the fourth quarter.
Citigroup and Goldman Sachs, two leading American banks, performed outstandingly in trading business. Among them, Citi's better-than-expected performance boosted revenue, helping to offset the impact of a sharp decline in investment bank revenue. It is reported that the bank said that trading business revenue increased by 25% year-on-year to US$5.3 billion due to strong performance in its fixed income products and equity derivatives. It is worth mentioning that revenue from Citi's Treasury and Trade Solutions business soared 33% in Q2, helping the division to its best quarter in a decade. The business transfers $4 trillion to corporate clients in 140 currencies a day. Citigroup said the division's performance was driven by higher interest rates and higher deposits.
In addition, Goldman Sachs' second-quarter revenue exceeded expectations mainly due to the soaring revenue of fixed income, foreign exchange and commodity business (FICC). The bank's FICC business generated $3.61 billion in revenue, surpassing StreetAccount's forecast of $2.89 billion, due to a "significant increase" in trading activity in interest rates, commodities and currencies. Goldman Sachs also earned $1.2 billion in commissions by providing consulting services for mergers and acquisitions in the second quarter. Goldman Sachs' consumer banking and wealth management business revenue increased by 25% year-on-year to US$2.18 billion, accounting for about 18% of the investment bank's second quarter revenue. This is thanks to Goldman Sachs online banking mobile app Marcus and a professional team serving wealthy clients.
In general, although the six major U.S. banks have declined in investment banking business and non-interest income, their net interest income has risen due to the Federal Reserve's interest rate hike. For example, Bank of America's revenue rose 5.6% in the second quarter to $22.79 billion. Among them, net interest income soared 22%, to US$12.4 billion. This is due to rising interest rates and loan growth. On the one hand, the Federal Reserve raised interest rates several times this year, and the rise in interest rates directly increased the profits of banks' loan business; on the other hand, loans in the commercial sector of the Bank of America increased by 16%, while consumer loans increased by 7%.
Therefore, how the banking industry will perform in the future depends on whether the growth of net interest income coupled with the growth of trading sector revenue can compensate for the frozen investment banking business caused by the Fed's aggressive interest rate hike and possible credit losses caused by the recession. Regarding the sharp drop in investment bank revenue, some analysts pointed out that the current financial industry's revenue has generally declined year-on-year, partly because a year-on-year wave of corporate mergers and acquisitions made Wall Street investment banks make a lot of money, and now the merger and acquisition wave has cooled down, and major companies have entered a wait-and-see state, causing Wall Street investment banks to have a significant decline in business volume. But it is worth noting that the corporate merger and acquisition boom a year ago was not the norm, so it is understandable that the cooling of the merger and acquisition boom is nowadays.
Wall Street bank executives are optimistic about loan growth
Analysts and investors have been paying close attention to loan growth, the core driving force of bank revenue. The unconventional stimulus measures introduced by the government during the COVID-19 pandemic have curbed interest in bank loans by businesses and consumers. As the economy rebounded from the epidemic and government stimulus plans were withdrawn, U.S. loan demand began to rebound in the first quarter, driven by consumer spending and increased inventory by businesses. The trend of growing lending demand continued in the second quarter despite the Fed’s sharp rate hikes sparked concerns about a recession.
Wall Street Bank executives said they were optimistic about loan growth as loan demand for retail and corporate customers rebounded from lows in the second quarter .Among them, JPMorgan Chase and Wells Fargo said that their total loans in the second quarter increased by 7% and 8.4% year-on-year respectively, and there was little sign of deterioration in credit quality. JPMorgan executives expect loan growth to reach medium and high single-digit levels this year. "So far, the second quarter of 22 has consolidated our optimistic view," Wells Fargo analysts wrote. They noted that strong credit quality and loan growth have led to the best growth in commercial loans in 14 years, with net interest income up 10% month-on-month.
In addition, Wells Fargo, JPMorgan Chase and Citigroup all said that corporate clients’ borrowings increased in the second quarter, usually to make up for the rising costs caused by soaring inflation. For example, JPMorgan’s corporate and industrial loans grew strongly due to increased utilization of revolving financing and new account openings, both loans grew 6%, while commercial real estate loans rose 3%. It is also worth noting that shows that the Fed aggressive interest rate hike is causing home buyers to delay buying. Freddie Mac said last week that the average interest rate on 30-year fixed-rate mortgages was 5.51%, compared with 2.9% in the same period last year. Affected by this, Wells Fargo's housing loan revenue fell 53% year-on-year in the second quarter, JPMorgan's housing loan revenue fell 26% year-on-year, and mortgage loan issuance fell 45%.
Although the mortgage decline caused by rising interest rates has dragged down the consumer loan portfolio, credit card loans have increased significantly, with JPMorgan Chase and Wells Fargo both reported 17% increase in credit card loans. Average loans from Citi personal banking and wealth management departments (including credit cards) increased by about 4% over the same period last year. Bank executives noted that credit quality remains high, but warned that inflation could curb consumer spending. Judging from JPMorgan's second-quarter financial report, consumers' spending on Chase credit cards increased by 21% year-on-year and 15% month-on-month, but consumer and community banking (CCB) revenue fell by 1% and profits fell by 45%. According to the Federal Reserve data, as of the end of June, US Bank's commercial and industrial loans were close to $2.7 trillion. This is 6% higher than at the end of March and 9% higher than a year ago.
What do Wall Street bank executives have on the recession?
Jamie Dimon, CEO of JPMorgan , reiterated his cautious view that geopolitical tensions, high inflation, falling consumer confidence, uncertainty in interest rates, unprecedented quantitative tightening and their impact on global liquidity are likely to have a negative impact on the global economy at some point in the future. In early June, he warned that an economic "hurricane" was approaching. This time, Dimon avoided the specific statement of how much impact the economy will be, indicating that the range of the result is "soft landing to hard landing", which is determined by the extent to which the Fed raises interest rates to curb inflation.
Morgan Stanley CEO James Gorman warned that the United States may fall into some form of recession, but it is unlikely to be "deep and dramatic." He also used the Russian-Ukrainian conflict, interest rate hikes, economic threats and other factors as examples: "'s current environment - if I had to describe it in one word, it would be complicated . However, I think it's important that this is different types of pressure in the financial system. Frankly speaking, the banking industry is much stronger now than last time."
Wells Fargo expects the U.S. economy to fall into a recession of about a year in a relatively short period of time, and continues until mid-2023. "The U.S. economy is slowing faster than most people realize. Although investors slowly digest the impact of a lower earnings expectations in 2022, more volatility is likely to occur in the stock market in the near future. is expected to continue to recover in the economy and profits for much of 2023 and 2024. "The bank urges investors to be patient. Although Goldman Sachs
Goldman Sachs did not directly express his views on the recession, the bank's CEO David Solomon said on the second quarter results call: "We see that inflation is deeply rooted in the economy. What's unusual about this special period is that demand and supply are affected by exogenous events, namely the epidemic and the conflict between Russia and Ukraine. As central banks around the world continue to tighten financial conditions to fight inflation, the already turbulent asset class market will continue to fluctuate.The trend of resistance to inflation will begin to affect corporate confidence and consumer activity. "
Bank of America CEO Brian Moynihan said that the Fed will struggle to fight inflation by slowing the U.S. economy as consumers continue to spend, and lending has returned to pre-pandemic levels driven by credit cards and mortgages. The three months to June were the highest period of debit card spending on record. U.S. banks increased lending, unemployment hovered around 3.6%, and executives of major banks pointed out that discretionary spending continued to be strong and account balances increased, even as prices of essential goods soared.
is in response to the risk of economic deterioration. The leading Wall Street banks have made these preparations
It is understood that even though Goldman Sachs announced a much-expected second-quarter results, it still warned: "Given the challenging operating environment, we are reviewing all forward-looking spending and investment plans to ensure that our resources are best utilized. Specifically, we have decided to slow hiring and reduce the fees for some professionals, although these moves will take some time to reflect in our performance. Goldman Sachs also said it will resume annual performance reviews of employees at the end of the year, a process that was suspended during the pandemic. The bank's move is a strong signal that Wall Street banks may consider layoffs as the trading business prospects become more challenging. Wall Street's recruitment efforts have weakened this year after last year's hiring frenzy.
Previously, Morgan Stanley also said at the end of May that it would lay off about 2% of its employees worldwide due to uncertain global economic outlook. It is reported that the layoffs have had an impact on the entire bank's business, and most of the affected employees have been notified. Most of the layoffs will occur in the technology and operations departments. People familiar with the matter said the Wall Street investment bank and wealth company have been working hard to lower their compensation spending, as the bank expects revenue to be under pressure next year by market volatility, ongoing trade tensions and a global economic slowdown. In addition, at the end of , JPMorgan Chase said it would cut hundreds of housing mortgage workers and redistribute hundreds of employees as fast-rising mortgage rates make the original Demand in the booming housing market has declined. People familiar with the matter said that the total number of affected employees will exceed 1,000, of which about half will be transferred to different departments.
In addition to layoffs, According to the latest second-quarter financial report released by the banking industry, in order to cope with the slowdown in the U.S. economic growth and even possible recession, major U.S. banks have begun to increase credit loss reserves and suspend stock repurchases to improve corporate cash flow. JPMorgan set aside $1.101 billion in credit loss reserves in the second quarter, while the same period last year released $2.285 billion in credit loss reserves, reflecting the deteriorating economic outlook. In the previous quarter, JPMorgan Chase had already suffered high inflation and Ukraine's dangers due to high inflation and Ukraine.
In addition, Citibank set aside $375 million in credit loss reserves, while in the same period last year and the first quarter of this year released $2.402 billion and $138 million in credit loss reserves respectively. The performance report released by Wells Fargo, which focuses on retail and commercial banks, showed that the company set aside $580 million in credit loss reserves in the second quarter, while in the same period last year and the first quarter of this year released $1.26 billion and $787 million in credit loss reserves respectively. Morgan Stanley's credit loss reserves increased from $57 million in the first quarter to $101 million.
summary
, Michael Arone, chief investment strategist at State Street, said that , considering the possible slowdown in loan growth and the profit risks brought by inflation, the risks are greater than opportunities, and the future returns of bank stocks will continue to be disappointing.
, but considering the valuation of bank stocks, affected by the downward performance and the U.S. economic outlook, the KBW Bank Index, which includes major Wall Street financial institutions, has fallen by nearly 16% this year, and the banking industry valuation has dropped to its lowest valuation since the end of 2020. It is understood that is currently the S&P 500 banking sector's 12-month P/E ratio is 9 times, while its long-term average is 12.4 times.By comparison, the S&P 500 has a 16-fold price-to-earnings ratio, and it is clear that bank stocks are cheaper .
In addition, according to the results of the US banking industry's "annual health check" released by the Federal Reserve last month, all banks it reviewed have passed the 2022 stress test. This means that all banks meet minimum capital requirements and can continue to repurchase and dividend payments. Under pressure conditions, all banks tested remained above their minimum capital requirements, despite forecast total losses of $612 billion. Under pressure, the total capital that provides buffer losses is expected to fall by 2.7 percentage points to a minimum of 9.7%, which is still more than twice the minimum requirement.
It is understood that the Fed's stress test helps ensure that large banks can support the economy during a downturn. These tests assess the resilience of large banks by estimating capital levels, losses, incomes and expenses in the hypothetical scenarios over the next nine quarters. The Federal Reserve also said in a statement that "bank capital levels are strong, allowing them to continue to lend to households and businesses in the event of economic downturn." Dimon said on the conference call that the highlights of 's current banking business include commercial credit, which is the best he has experienced. When asked whether the bank would cut spending in the context of an expected recession, Dimon said there was no plan to do so this year.
This shows that banks that passed the annual stress test last month were much safer even if the recession affected loan growth. Financial institutions are fully capable of withstanding any slowdown. Therefore, bank stocks are expected to grow steadily amid market turmoil in terms of current cheap valuations and optimistic loan growth prospects.
