US banks under pressure as US economy slows
After some decent gains in 2021, which saw the basket of US bank stocks post gains of just under 40%, with companies like JPMorgan Chase and Goldman Sachs posting record highs, the first 6 months of 2022 have seen experienced a significant correction, as a good portion of the strong gains since the 2020 lows begin to unravel.
One bank initially managed to buck the trend, with Morgan Stanley briefly hitting new highs in February this year, but since those spikes and the Russian invasion of Ukraine, US banking sector losses have accelerated.
It would be easy to argue that events in Eastern Europe were the catalyst for the declines we have seen so far this year, but the writing was on the wall even at the end of last year.
These concerns have already been reflected in a strong November selloff in JPMorgan Chase stock price in November on concerns about the consumer sector, and loan growth in particular, which had been cited as a concern since the second trimester.
A tailwind that all US banks experienced last year was the release of loan loss provisions throughout the year, which boosted payments. These releases are due to the huge sums of money set aside by US banks due to the pandemic due to concerns about soaring unemployment and widespread defaults, which never happened.
This was due to unprecedented fiscal support from the US government which protected jobs, as well as the US economy, and in many cases may have been too generous.
With those loan loss provisions very firmly in the rearview mirror and an impending economic slowdown, even as the Federal Reserve signaled a change in monetary policy in March, investors began to pull money out of the banking sector in late from last year.
The weakness we started to see late last year accelerated in the wake of January’s fourth quarter figures which showed that despite record revenues, rising costs and weaker retail lending showed that the economy was weakening.
Performance of US banks – year-to-date
Source: CMC Markets
When JPMorgan Chase reported in January that banks’ lending operations saw declines in home loans and personal loans. Reportedly, higher rates led to a 26% drop in home loan revenue to $1.1 billion, with credit card and auto loan application revenue falling 9% to $5 billion.
This is a trend that has been repeated in from Citigroup figures too, with retail experiencing a sharp drop in revenue. Services revenue fell to $1.3 billion, while mortgages also fell, while costs rose.
As we moved forward into April and the first quarter numbers, with revenue on both the commercial side and the bond side of US banks’ business models holding up reasonably well, margins were starting to come under pressure.
There were a number of reasons for this, with economic conditions becoming less supportive, while the Federal Reserve began to tighten monetary policy, at the same time as Russia upended the global economy by invading Ukraine, causing widespread sanctions and isolation in the process.
These headwinds prompted the start of a safety-first approach for U.S. banks, which began to rebuild provisions for credit losses linked to rising inflation.
This increase in provisions also appears to have coincided with a sharp rise in consumer credit which, after a weak January, exploded in the following three months, reaching a record high of $47.34 billion in March, while that we also saw gains of $37.7 billion in February and $36.76 billion in April, a total of almost $122 billion in 3 months, and almost as much as what we saw in the during the last 6 months of 2021.
In this regard Goldman Sachs set aside $561 million as provision for credit losses related to the growth of its credit card portfolio, a move it repeated with another $667 million in the second quarter.
JPMorgan Chase also increased its provision for credit losses, adding $1.5 billion in the first quarter and then another $1.1 billion in the second quarter, as rising prices further strain consumer balance sheets. This appears to be in response to a large increase in lending, although mortgage lending remained subdued, with the bank announcing in late June that it was laying off or reassigning more than 1,000 employees from its mortgage business.
Bank of America has appeared in recent months to be more optimistic about the US consumer and therefore the economy, even if its share price performance does not reflect this optimism. CEO Brian Moynihan sounded rather optimistic about the outlook in April, saying US consumers were still sitting on big bucks. Seems doubtful if credit card loan growth is any guide, but they maintained that uptrend earlier this month with their second-quarter numbers, despite setting aside $523 million in credit losses.
Banks have also had to deal with reduced exposure to Russia, which has its own costs on a sliding scale, with Citigroup saying it expects losses of $2 billion in the worst-case scenario. setting aside $1.3 billion in the process.
As we look to the rest of the year, JPMorgan warned that the deteriorating economic outlook is likely to impact sector performance over the rest of the year.
The bank cited high inflation, geopolitical uncertainty due to Russian escalation and the Federal Reserve’s rate hike in a downturn.
Consumer spending in the US is holding up for now, but elevated inflation may well ease in the coming months. Gasoline prices have started to decline in recent weeks, which has eased some of the pressure on consumers’ wallets, but further price pressures may dictate as winter approaches.
Much will depend on how the US economy performs over the rest of the year, and although we have seen a modest rebound in US bank stock prices in recent days, we are still in the downtrend we have seen. since the February peaks.
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