Checking in on the banks (redux)
Daily Data: Pretty clean bill of health, with some minor bumps and bruises
In today’s dispatch:
Big banks report for duty
Some things are good, others not so bad
Peering into the present of “higher for longer”
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Checking in on the banks (redux)
Previously. And now, a whole bunch of big banks reported this week, and here’s the gist of it:
lending is stagnant and less profitable;
investment banking and trading, however, were both strong;
credit quality is also pretty darn good.
This is pretty much what Random Walk would expect (although there are still a few more to go).
There was both a fair amount of syndication and a lot of general dealmaking in anticipation of rate cuts that never came, which helps explain the trading and banking fees. Presumably Q2 will be less plentiful in that regard.
Commercial lending, though, is still hard to do with rates as high as they are. Presumably, this will stay the same.
Credit quality was a bit more of a wildcard, but at worst, it would have been slightly worse, and at best, it’s slightly better (which is where it landed). This also should continue to be directionally right.
Anyways, consider this a hodgepodge of illustrative charts to demonstrate the points above.
Commercial lending is flat
Lending growth (outside of consumer lending) is generally pretty flat (via Semafor):
Big banks have been relatively slow to adapt (and have the regulators up in their grills), so for now, private credit is going where the banks can’t or won’t go.
Banks have grown their businesses with lots of credit card lending, but traditional commercial lending has gone elsewhere.
Likewise, the lending that they are doing is progressively less profitable.
Net-interest-margins (NIM) are getting tighter, as the cost of deposits outruns the added interest they can charge:
This is just M&T bank MTB 0.00%↑ (the hero from earlier this week, who otherwise had a pretty strong showing), but the other banks reported along similar lines (more or less).1
Again, none of this is surprising.
Random Walk previously wondered what exactly banks would do, if rates (and the cost of deposits) stayed high, while traditional commercial lending either didn’t pencil, or was otherwise beyond their grasp.
Zombie banks are the grim European analogy, and although that’s probably not in the offing for larger banks, it’s a legit concern for the regionals further down the food chain.
Gotta watch that NIM.
In the meantime, money market funds continue to hoover up more and more cash, making those deposits harder to come by.
Investment banking and trading had a nice quarter
On the plus side, trading and advisory work have had a nice comeback (via FT):
Dealmaking was active, when rate cuts were right around the corner.
Presumably some of this cools off, now that investors will feel less urgency to lend when rates are still high, but perhaps not.
The alternative is that stakeholders have waited long enough, and deals have to get done, even if the price isn’t entirely right.
That too is good for fees.2
Credit quality was pretty OK
Credit quality was generally pretty sound.
BofA did have worse CRE-related losses than expected (BofA):
The street expected $1.26B. and BofA gave them $1.5B.
OK, not the best, but not the worst.
The good news is that BofA’s (relatively higher income) consumer credit customers were less behind on their credit cards:
Delinquencies look like they’re rolling over (which means that whatever Experian was reporting, is probably further down market).
Peering into the present of “higher for longer”
So, there it is.
Random Walk is by no means a banking expert (and these are broad brush strokes), but it sure seems like a relatively clean bill of health, all-in-all.
Clean is good, even if it’s not exactly a cause for celebration.
The trading and advisory income were nice, but query how sustainable they are. It’s just hard not to get the impression that private credit is going to be a substantial player for traditional lending going forward (while the broader business of banking-with-deposits gets a bit more boring).
Maybe that’s a good thing.
In all events, banks are worthwhile place to look, if you want to understand the shape of capital markets in a ‘higher for longer’ world. They’re also a decent bellwether for capital markets, generally.
Previously, on Random Walk
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See, e.g. PNC for a similar story. Pretty good quarter for operational efficiency and credit quality, but NIM went from 2.66% to 2.57%