August 10, 2022
Last week, Q2 2022 earnings kicked off as they always do: with the banks.
There were a few big conclusions from the slew of names which opened up the doors for earnings season. The $XLF, an ETF tracking financial companies, was up 1.25% on the week – which can only be ascribed to the reports.
For that reason, we’ve decided to summarize the circumstances around which the broader financial sector moved north last week.
The “recession” is nowhere to be seen
Nearly every bank to report acknowledged the impact that global inflation and changes in macroeconomic policy was having on the markets and economy.
Almost every bank put aside cash, or underscored that it would take a conservative approach to the forthcoming recession. There’s just one problem: almost none of them are seeing a recession yet.
Consumer banks bask in higher interest rates, even in spite of low consumer confidence
If you read only headlines, you’d think that the U.S. was entering something akin to the Great Depression or Great Recession. However, JPMorgan analysts said that credit and debit card spending is up 15% YoY. And in June alone, retail sales rose more than analysts expected.
Bank of America reported on Monday, offering a perspective of how this looks for consumer-facing banks: the company’s revenue climbed 5.6%, besting analyst estimates. Higher interest rates and loan growth was largely to thank.
Investment banks? Not so hot
When the public thinks about banking – their impressions are likely checking and savings accounts. In reality, there is a whole lot more to the banking and financial business than custodying cash. Many of America’s largest banks help companies go public, acquire other companies, or merge with others – and naturally, some also provide lending, consulting, and other services. The takeaway? Confidence among business leaders is low, and the very accretive deal flow for banks like JPMorgan and Morgan Stanley has washed up… at least for now.
Banks are taking “provisions” and write downs for losses to come
In spite of the positive looks that analysts and bankers are giving the space, they’re preparing.
JPMorgan Chase CEO Jamie Dimon cautioned in June that analysts and investors brace themselves for “an economic hurricane.”
The company suspended buybacks and had a $1.1 billion provision for credit losses (most of this went to charging off bad loans and putting aside cash for future loans expected to sour) in the quarter. That trend was seen at a number of other banks, a sign of concern among bank leaders: Bank of America took a $523 million provision; PNC took a $36 million provision; Goldman Sachs set aside $667 million for credit losses.
Ultimately, financials did move north in spite of their increased caution – a sign of confidence from investors. However, the prevailing headwinds in banking offer an augury for economic turbulence, much as Dimon (and other finance leaders) have cautioned about.