The calm before the storm?

For retail banks

Overall, it was a great quarter for major retail banks (JP Morgan, Bank of America, Citigroup, Wells Fargo And PNC Financial Services Group).

There are two explanations for his successful publications:

  1. A very noticeable expansion of the net interest margin because these institutions are taking full advantage of the rise in interest rates. Their cash and cash equivalents are better remunerated and their loans are made at higher rates, but they have not yet increased the remuneration of their clients’ deposits to the extent of the rise in rates. in short, it’s a really good time for retail banking, but it shouldn’t last long. Also, deposits have started to decline due to this (customers will redeem their cash elsewhere).
  2. Despite the exceptionally unfavorable environment, borrowers (consumer how corporate) remain demonstrably solvent and in good health. All the banks have insisted on this point. We also note that the provisions for defaulting loans are still at very low levels, with here, as usual, Citigroup in the role of bad student (but they have a very international portfolio, exposed to riskier markets than the US). Note that the regulation is now very strict with the new CECL system (Current expected credit loss) launched in 2020 which effectively obliges banks to anticipate the financial stress of their borrowers even before it occurs. The idea is obviously to see the storm arrive well in advance. Despite this, credit losses remain very low, a sign that the economy is not (yet) in bad shape.

For investment banks

This is generally less good for investment banks (Goldman Sachs, Morgan Stanley, Jefferies) which was obviously expected as we have seen with falling markets. The freezing of IPOs is one of its consequences. As for the current bond slump, this is a major stress on the credit markets, with companies looking to deleverage and build up reserves for the oncoming storm rather than massive borrowing.

There, too, there is a “reverse” adjustment effect, but this time in an unfavorable direction for the investment banks: their income is falling but not yet their cost structure.

About this topic, Goldman Sachs detonates a bit, announcing yet another reorganization that arouses a little eyebrows: merger of the “investment banking” and “trading” activities (despite what appears to be an obvious conflict of interest) and merger of “asset management” and “consumer” banking ”(which actually looks like an admission of bankruptcy by Marcus, the retail banking service of Goldman Sachs which shows how difficult it is to mix genders (retail banking and investment banking are really two separate professions).

Stock market trend of bank stocks since the beginning of 2022:

Source: Zonebourse

Prepare for the coming storm

Overall, all banks appear to be preparing for a difficult future in the near term. Officials are raising fears of recession. Surely you have heard of Jamie Dimon who has been particularly outspoken on this subject by announcing a recession for next year (2023) and pointing out that economic agents as a whole dramatically underestimate the severity of events in Ukraine. . That said, his cautionary statements have not yet been followed up. Once again, the provisions for non-compliant loans are kept at low levels. Similarly, the amounts lent (large loans) remain high, even on the rise Bank of America And Wells Fargo & Company.

In all banks we see a very pronounced slowdown in share buybacks following the sharp rise in stock valuations (we can therefore congratulate them on their timing). On the other hand, the dividends are obviously maintained.

Note that accounting earnings (net income) of banks do not always illustrate real dynamics for two main reasons:

  1. First of all, to estimate the dynamics of the operations, it is better to look at the profit before tax and before provisions. If we look at the latter, we see that the big banks had a very good quarter overall;
  2. Then, due to the mark-to-marketor by recording the value of the assets based on their market price.


As expected, the results were good for traditional banks and less for investment banks, which are suffering from the turmoil in the financial markets. We wonder with curiosity if this neighborhood is not the last ray of sunshine before the storm that looms. The market seems to have understood this with the recent declines in September.

We do not fall into too confident a parallel with the financial crisis of 2008, banks are now more supervised, regulated and have much stronger balance sheets.

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