Tea Leaves and Emerging Economic Trends

What bank earnings say about the future

July 21, 2022
Tea Leaves and Emerging Economic Trends

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Bank stocks are often perceived to be a harbinger of broader economic trends so BankerAdvisor wheeled around some of the big banks’ reported second quarter earnings to spot broad movements, and what they might portend for the balance of this year and 2023.

Our conclusion: despite rapid inflation and slowdowns in several segments such as M&A, home mortgage and auto loan originations, consumers and businesses seem to be in a solid position for now.

However, banks are certainly jittery about the broader economic climate and are setting aside large war chests of cash for significant slowdowns. A plurality of 750 CEOs from a Conference Board survey found that a recession was imminent in the next 12 to 18 months. JPMorgan & Co. Chief Executive Jamie Dimon used more colorful language saying, a “hurricane is right out there down the road coming our way.”

There may be some pullback from the inevitability of recession in the U.S. Where there is little doubt is the division among the classes in how hard economic conditions are and may become. While well-heeled US and Western consumers are able to slough off steep inflation increases so far and continue to spend money on travel and dining, more middle market consumers are feeling the pinch and having to dip into cash reserves.

In the developing world, as evidenced in Sri Lanka’s unrest in the face of 80% food inflation and similarly high inflation in places like Argentina, political and economic structures are roiled by shortages. Even in Germany, where a temporary agreement to continue the receipt of Russian natural gas through the Nord Stream Pipeline is mitigating short-term energy fears, there are longer-term concerns about access to energy and what scenarios a cold winter might bring

Here are more highlights:

Earnings Fall Across the Board

Second quarter profit fell for major banks reporting, including JPMorgan (-28%); Morgan Stanley (-29%); Citigroup (-27%) and Wells Fargo (-48%).

Consumers Still Spending and Borrowing

With unemployment still low and consumers still JPMorgan, who, as The Wall Street Journal writes, “is typically viewed as a barometer on the broader economy given the bank’s insight into consumer and financial health” offered little in terms of prognostication on their behavior.

Instead, JPMorgan emphasized that consumers are still spending money on items such as travel and dining, as they are buttressed by a still strong hiring market and wage growth.

Morgan Stanleys Chief Executive echoed that the economic outlook is complicated but “not 2008 complicated.” Wells Fargo’s outstanding loans rose 11% from 2021 and loans in the bank’s consumer division rose 5%.The bank said it was putting aside $235 million in funds to cover potential losses. JPMorgan announced in April it was setting aside $900 million for economic weakness.

Originations Down

Mortgage demand fell to the lowest point since 2000, according to the Mortgage Bankers Association, as buyers have lostpurchasing power with rapid rate increases.

Indeed, mortgage originations were down 45% for JPMorgan and auto loan and lease originations were down 44%, as were refinancing of home mortgages. However, loans to middle-market businesses in JPMorgan’s commercial bank increased 10%.

Wells Fargo, a major mortgage lender, had mortgage originations fall 36% in the second quarter. Wells’ CFO also signaled that the mortgage business would be challenging, at least for the next couple of quarters. Auto loan originations for Wells Fargo decreased 35%

M&A Wanes - Investment Banking Fees Drop while Trading Revenues Increase

Investment banking fees dropped 54% at JPMorgan and 55% at Morgan Stanley. This was a reflection in a slowdown of corporate deal making. Deals are in the pipeline according to JPMorgan but a more challenging environment means a number of deals won’t reach fruition. However, with the volatility of the market up, so were trading revenues.

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