Timely Financial News

From The Wall Street Journal: Is the Banking Crisis Over? We Could Be About to Find Out

BY Spectrum Wealth Management | Jul 31, 2023
 By Ben Eisen
July 13, 2023

Lenders will sort through the damage from this year’s banking crisis when they report their financial results starting Friday.

Earnings for the second quarter will show whether the recent failures of three lenders and a slowing economy are eroding what has been a long period of strength for the industry. Earnings are expected to fall 7% in the quarter from a year earlier, according to Keefe, Bruyette & Woods.

JPMorgan Chase, Wells Fargo and Citigroup report on Friday. They will be followed by Morgan Stanley and Bank of America on Tuesday, and Goldman Sachs on Wednesday. Regional banks including Zions, Citizens Financial and Comerica begin reporting next week.

The biggest banks are expected to have fared well, or in some cases thrived. JPMorgan, the largest U.S. bank, bought First Republic Bank when it failed in May. Smaller banks may face more pressure. 

Deposit Costs

Banks of all sizes are expected to have paid more interest to customers to keep them from moving money to higher-yielding money-market funds. That could weigh on net interest income. (For more on net interest income, check out these charts.)

Some banks have turned to higher-cost deposits, such as those that are “brokered” through third parties. All of the four largest banks had more brokered deposits at the end of March than a year earlier, though they represent a small share of all deposits, according to financial filings.

At PacWest and Western Alliance, two regional banks whose stock prices have recently been under pressure, brokered deposits made up roughly a fifth of all deposits at the end of March, according to financial filings, up from less than 5% a year earlier.

“Now that things have settled, it puts more attention on the deposit mix,” said Christopher McGratty, head of U.S. bank research at KBW.

Bond Losses

The value of some assets is also declining. Interest rates rose in the second quarter, which hit the value of low-rate securities and loans that banks hold on their balance sheets. Banks had more than $500 billion in unrealized losses on their securities at the end of March, according to the Federal Deposit Insurance Corp.

They don’t need to recognize swings in the value of their bonds if they don’t make them available to sell. But holding low-rate assets can be a drag on profitability because it means banks can’t lend that money out or invest at higher rates. 

Bank of America, for example, had some $100 billion in unrealized losses on bonds at the end of the first quarter. It doesn’t expect to sell the bonds. Still, investors have punished its stock this year relative to other banks.

Rainy-Day Funds

Banks are likely to sock away more money to deal with soured loans, McGratty said.

In particular, banks are sizing up potential losses in their commercial real-estate portfolios. Wells Fargo, for example, said last month it expects to reserve nearly $1 billion, more than it had set aside in the first quarter, largely to deal with its commercial real-estate loans.

Large banks have significant real-estate portfolios, including loans for office buildings that are slow to fill back up. But they aren’t as concentrated in the sector as some of the smaller banks.

Wall Street Doldrums

Calmer markets in the second quarter meant less trading on Wall Street. Goldman expects trading to be down 25% from a year ago. Morgan Stanley expects a soft quarter too. 

Investment-banking revenue stayed in the doldrums, said David Konrad, an analyst at KBW. While M&A activity picked up over the last few months, fewer deals closed. That is when banks usually get paid.

Blah Bank Stocks

Shares of all six major U.S. banks have lagged behind the S&P 500, which has rebounded strongly this year. Many investors and analysts see little reason to get excited about the stocks.

Some are worried that more loans could sour if the U.S. heads into a recession. New capital rules may impose further costs on the largest banks.

Smaller banks perceived to be weaker are especially vulnerable to share price volatility.

Write to Ben Eisen at ben.eisen@wsj.com

This article was originally published in The Wall Street Journal on July 13, 2023, and written by Ben Eisen. Image courtesy of Clarissa Bonet.

  1. https://www.wsj.com/articles/is-the-banking-crisis-over-we-could-be-about-to-find-out-44b49fb8

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.