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Major American banks are gearing up to report
their first-quarter earnings, hoping to distance
themselves from recent troubled banks such as
Silicon Valley Bank. JPMorgan Chase,
Citigroup, Wells Fargo, and PNC will report
their earnings on Friday, with Bank of America
and Goldman Sachs set to report on Tuesday.
Morgan Stanley and U.S. Bancorp will follow
on Wednesday. This earnings season is highly
anticipated as it comes after the recent seizure
of regional lenders. Although some of the
initial panic has subsided, banks are still
facing challenges such as deposit outflows,
margin compression, slowing loan volumes,
and tighter regulations. Investors will be
closely scrutinizing the banks' financial
performance to see how they are positioned to
weather the chaos that rocked the industry in
March. Analysts expect JPMorgan, Citigroup,
and Wells Fargo to show year-over-year
increases in revenue and profit, but net income
is expected to drop compared to the prior
quarter for JPMorgan and Wells Fargo.
The banking industry is facing a significant
challenge in the wake of rising interest rates,
which are impacting both deposits and assets.
With many bonds held by banks underwater,
the potential for significant losses if forced to
sell them is causing concern. Furthermore,
banks are losing deposits as customers turn to
money market funds offering higher interest
rates.
According to Wedbush Securities analysts,
David Chiaverini and Brian Violino, the
competition for deposit gathering was already
fiercely competitive, but recent bank failures
may turn the deposit knife fight into a
metaphorical gun fight. The loss of deposits
through the end of March amounted to almost
$500 billion across the industry, with small
banks bearing the brunt of the outflow. While
JPMorgan and Wells Fargo have experienced
small deposit declines, Citigroup is expected
to show a small increase.
Although higher interest rates can allow banks
to charge more for loans and potentially boost
their income, the concern is that banks may
need to pay more to attract or retain
depositors, leading to a decline in the
profitability measure known as net interest
margin. Some analysts predict that banks may
warn of this tightening, even if it did not occur
in the first quarter.
As banks grapple with rising deposit costs,
April earnings are expected to focus on the
outlook, rather than the results. Betsy Graseck,
an analyst at Morgan Stanley, recently revised
down predictions for bank profitability over
the next two years, citing the impact of rising
deposit costs. It is clear that banks must
navigate a complex landscape as they seek to
balance the challenges of rising interest rates
with the need to retain and attract deposits.
As rising interest rates take their toll on the
banking sector, deposit gathering has become
an intensely competitive environment. Even
before the failure of Silicon Valley Bank in
March 2023, banks like JPMorgan and Wells
Fargo had already been losing deposits to
money market funds that offer higher rates.
However, the situation worsened significantly
for some institutions during the latter half of
the month. According to Federal Reserve data,
banks lost nearly $500 billion in deposits by
March 29, with small banks experiencing a
more significant decline than their larger
counterparts.
Despite the negative impact of deposit
outflows, higher interest rates do have a silver
lining for banks, allowing them to charge more
for loans, which may improve their income. In
fact, JPMorgan has predicted an 11% increase
in net interest income this year, amounting to
$74 billion. Nevertheless, concerns persist that
banks may have to pay more to attract and
retain depositors, which could lead to a
shrinking of the key profitability measure
known as net interest margin.
Apart from deposit gathering, investors are
also interested in whether banks are pulling
back on lending or making fewer new loans,
which could affect the economy by reducing
the flow of credit to businesses and
consumers. The latest data from the Federal
Reserve reveals that bank lending fell by
almost $105 billion across the industry in the
two weeks ending March 29, primarily due to a
pullback by smaller institutions. This is the
largest drop since the Fed started tracking
such data in 1973.
Another area of concern is the possibility of
tighter regulation of the industry, a move that
could affect future profitability. Although
President Biden has asked regulators to
strengthen rules governing the oversight of
regional banks, JPMorgan CEO Jamie Dimon
has warned against knee-jerk reactions or
politically motivated responses that could
have unintended consequences. Meanwhile,
FDIC Vice Chairman Travis Hill has said that
blaming the failure of Silicon Valley Bank on a
law passed during the Trump administration is
misguided.
Looking ahead, investors will be closely
watching bank CEOs for their outlook on the
sector's profitability, particularly given the
impact of rising deposit costs. Billionaire
Warren Buffett has noted that bank failures
may still occur due to the mismanagement of
assets and liabilities. He warns that banks can
lose public confidence in seconds and that
more banks could fail in the future.
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