Balancing Acts: A Pulse Check on Q2 Bank Earnings Amid Economic Ripples

Q2 2023 bank earnings reveal a resilient banking industry, facing challenges but still profitable amidst looming recession threats.

In a surprising turn of events, banks have ushered in the Q2 earnings season with good news, despite looming threats of a potential recession. On one hand, banks are feeling the sting of higher interest payout on savings deposits and a not-so-favorable fee environment for other businesses. On the other hand, profitability seems to be holding up, thanks to higher interest rates boosting net interest income (NII).

Morningstar equities strategist, Eric Compton, believes that early results are consolidating confidence around the profit outlook for major banks. This seems to refute negative press surrounding the banking industry, portraying them in a more positive light. What’s more, consumers continue to display resilience despite higher rates, signifying the stability of the economic system.

The second quarter saw the Morningstar US Banks Index down by 3.7%, an improvement from a 13% drop in the first quarter. Large commercial banks such as JPMorgan Chase, Wells Fargo, Citigroup, Bank of America, and PNC Financial Services Group have reported decent Q2 results. Smaller regional banks are set to follow over the rest of the week.

A key concern in the industry has been problem loans, especially in commercial real estate. However, provisions for bad loans have been within expected limits. The fee environment remains lackluster, with investment banking fees still low and wealth-related fees recovering from Q1.

The silver lining in all this is that higher interest rates have assisted banks on the asset side, with businesses and individuals paying more on their debts. Yet, the same higher rates are causing deposit outflows, forcing banks to raise interest payouts to retain clients.

Furthermore, unrealized losses on bond portfolios following the 2022 interest rate hike continue to weigh on banks. Yet, Compton doesn’t expect any major surprises on this front. The trend of clients moving assets from savings accounts to higher-yielding money market funds is expected to slow as the Federal Reserve reins in interest rate hikes.

In terms of individual bank performances, JPMorgan outperformed estimates due to stronger NII, improved trading results, and lower-than-expected acquisition expenses. Wells Fargo also exceeded expectations, prompting the bank to raise its NII outlook. Citi just missed the mark while PNC lowered its full-year NII outlook. Bank of America reported stronger than expected earnings, largely due to higher NII and trading results, albeit with higher expenses.

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