Big Banks Top Q2 Estimates But Fail To Excite The Market As Caution Is In The Air

Bank of America Corporation BAC posted a second quarter profit that beat analyst forecasts as the company boosted interest income due to higher interest rates. Yet its shares traded only 0.6% higher in pre-market trading but rising more than 4% after earnings.  On Friday, Citigroup Inc C reported earnings and revenue beat expectations buy its shares sank 4.05%. Likewise, Wells Fargo & Company WFC reported better-than-expected top and bottom lines, while also raising its guidance for full-year net interest income but its shares still slipped 0.34%. Even JPMorgan Chase & Co JPM, known as the great dame of U.S. banks, didn’t manage to rouse investor interest with its net income skyrocketing 67% YoY but its stock only going up 0.6%.

Bank Of America

For its second quarter, Bank of America posted earnings of 88 cents, topping the 84 cents that Wall Street expected, on the back of revenue of $25.33 billion which also topped the expected $25.05 billion due to a 14% rise in interest income amid higher rates that resulted in a revenue rise of 11%. Earnings rose 19% YoY to $7.41 billion. On the other hand, Bank of America also rose its allowance for credit losses on loans from the first quarter’s $900 million to $1.1 billion which translates to a 120% rise compared last year’s reserves. 

Citigroup

Citigroup saw its profit shrink more than a third last quarter due to slower corporate spending and costly layoffs, among other factors. As fears of a U.S. recession materialize, net income went down from $4.5 billion it made during last year’s Q2 to $2.9 billion. Like its peers, Citigroup was affected by a slowdown in dealmaking, causing a 1% drop in revenue that amounted to $19.4 billion as corporate and investment banking slowdown caused the segment’s revenue to tank as much as 44%. Its performance was considerably worse compared to its peers. 

Citigroup also raised its provision for loan losses nearly 40 per cent to approximately $1.8 billion.

Wells Fargo & Company

Having kicked off the earnings season, Wells Fargo did not see expected damage to its commercial loan portfolio. Its net interest income rose 29% with net income surging 57% to $4.9 billion on the back of revenue rising 20% to $20.5 billion.

It also boosted its provisions for credit losses rose 43% compared to first quarter to $1.713 billion, which is 195% above the $580 million it reported in 2022’s Q2. CEO Charlie Scharf noted that the allowance was primarily related to its expectations of commercial real estate office loans which, according to Bloomberg data, make up about 22% of its outstanding commercial property loans. 

JPMorgan Chase & Co

JPMorgan Chase posted a 67% jump in Q2  profit as it earned more from borrowers' interest payments and benefited from the purchase of regional lender First Republic Bank.

JP Morgan revenue rose 34% to $42.4 billion as the bank made good use of higher rates and solid loan growth, with net income surging 67% to $14.5 billion, JPMorgan also increased its net interest income guidance the full year by $3 million to $87 billion compared to its May outlook.  Net interest income forecast for the year was also hiked from prior 10% growth projection to 14%. JPMorgan’s credit loss provisions also expanded 62% from 2022’s Q2 and 27% from the previous quarter, this year’s Q1, to $2.9 billion. 

Health of the banking system is better than expected, but there’s increased caution regarding what lies ahead.

Along with Morgan Stanley MS, five of the six largest U.S. banks largely topped Q2 estimates,  fueled by higher net interest income that came with higher interest rates. But the market’s response was muted. The big picture is that the banking system is healthier than expected, at least for the largest players, as Brian Mulberry, client portfolio manager at Zacks Investment Management, concluded in his note. However, the results did show clear signs that increased caution is in the air as all the above banks rose increased their funds for anticipated losses. Morgan Stanley, who also reported today, also followed this trend with a 59% rise in credit loss provisions that amounted to $161 million. However, Mulberry believes this is simply prudent risk management that protects against worst-case scenario, if there is one, as opposed to a warning of doomsday.

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