Big US bank profits show they can take a punch from low rates
Investors will need to see they can endure a real downturn before giving them credit
What did we learn from the avalanche of big US bank earnings this week? That the industry can take a hard punch — from interest rates falling to historic lows — and remain up on its feet.
Bankers and bank investors can breathe out, and start to think about whether there are more punches coming.
There was considerable anxiety coming into third-quarter results season. But the diversified giants, most notably JPMorgan Chase and Bank of America, showed real resilience. Most of the banks beat analysts’ earnings estimates, and a few of them by wide margins. Goldman Sachs, whose investment banking operation stumbled, was the notable exception.
Yes, revenue growth was lower because lending margins were tighter; lower interest rates and a flattening yield curve will have that effect. And the banks’ level of excitement about the state of the US economy has cooled somewhat. A year ago, for example, JPMorgan’s finance chief said: “We don’t see it slowing down.” This quarter, the economy was just “on a solid footing”. Such tonal downgrades were audible across the industry.
But even in the thinner air of late 2019, the banks’ business models are working. The big lenders are still collecting deposits, the lifeblood of the industry, at a healthy pace. Loan demand is holding up too. BofA’s loan book is growing at about 5 per cent, up by $43bn over the past year. Even Wells Fargo, its reputation under repair following the fake accounts scandal, is increasing its loans again.
As a result the margin compression, so far, has been moderate. Indeed, net interest income is still rising at the two biggest banks by market capitalisation, JPMorgan and BofA.
As a side note, it is interesting that the growth has different sources at the two banks. Both are harvesting prodigious flows of deposits — almost $140bn worth over the past year between them. But JPMorgan has said it thinks it wiser to invest that money into long-duration debt securities, which have modest yields but do not require much capital to be held against them. BofA, on the other hand, prefers higher-yielding, more capital-intensive loans. Only in the fullness of time, when the costs of impairments are counted, will we find out which strategy was smartest.