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Bank earnings: ‘We definitely heard some caution,’ analyst says

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S&P Global Market Intelligence Principal Analyst Nathan Stovall joins Yahoo Finance Live to discuss big bank earnings, the positives of rising interest rates, and the outlook for the economy.

Video Transcript

- Big bank earnings roll on today, Wells Fargo and Citigroup both reporting second quarter results, with Citigroup being the only bright spot for bank earnings so far, topping profit and revenue estimates. Joining us now to discuss is S&P Global Market Intelligence Principal Analyst Nathan Stovall. Nathan, good to see you here. So bank earnings largely done, at least for the big banks. We'll get B of A later on. Who had the best quarter and why?

NATHAN STOVALL: Who had the best quarter and why? That's a tough one. I mean, you've got to look at it sort of where we were coming from. We're seeing some pressure on P&C today. But they're one of the higher priced banks coming into this. We're seeing Citigroup have a nice pop, but they're one of the lower priced banks coming into this.

So I mean, I really think broadly the question-- the two questions we are looking for is, what was the outlook for loan growth, and what was loan growth going to be in the second quarter, and then perhaps even more importantly, credit and what's the outlook for credit? And thus far, loan growth numbers pretty much across the board have looked pretty darn good, even in the face of weakness in mortgage, which was expected. And credit has really held up.

But the issue is really for the street, what is the long term outlook? And we definitely have heard some caution in terms of looking into next year. But most of what we've heard from management teams is that a normalization of credit trends, rather than anything they're really, really fearful of.

- So let's talk about the loan side as well, and in particular, the sort of maybe divide that we're seeing for now, although I don't know if it'll last, between what seems to be maybe some continuing strength on the corporate side of the equation, things like commercial loans, for example, versus the mortgage side of the equation. How is that playing out? I know you commented a note to us about JP Morgan. How are we seeing the trends across the banks?

NATHAN STOVALL: Sure. Well, on the mortgage piece, as I said, it's no surprise that we're seeing weakness there. Just sort of think of it this way, with the increase we've seen in housing prices over the last few years and the sharp move up in mortgage rates, the debt service for an average borrower could be 2x what it was a few years ago. So that's going to put a lot of pressure on mortgage origination volumes.

And as I said that was expected. You've seen folks like the Mortgage Bankers Association put out pretty severe drops in their forecast for origination activity. But no doubt, commercial loan growth has really driven loan growth thus far this quarter. And you've seen that kind of across the board from all the big banks with strong numbers and loan growth actually beating a lot of the Street's expectations.

So that's pretty darn encouraging. You're not going to borrow, necessarily, unless you feel better about the future. So you haven't really seen corporate America pull back that much. Now we are coming off of low levels. We've been waiting for utilization rates to pick up. And we've heard from a few management teams that they're back close to sort of pre-pandemic levels. So those have been fairly positive results thus far.

- The banks, by and large, they don't look like their expense bases have been taken down enough to prepare for what could be a recession next year. Do you think they'll start doing that?

NATHAN STOVALL: I think they're working to. I mean, no doubt that is one of the conversations we hear all the time. Everybody's trying to get more efficient any way they can. But they, like everyone else, is feeling pressure on expenses, higher operating costs, including in wages. Every discussion we have is that they're feeling that pressure from the top line. It's sort of the executive or even middle management level all the way down to bank tellers.

So they're feeling that pressure. Last quarter we saw a lot of banks come in and miss expense numbers. Thus far, it feels like it's kind of there. I think the Street was expecting greater improvement last quarter and maybe has gotten greater appreciation of some of the pressures that's facing the group. But they are working to get more efficient. They're trying to roll out more technology. But we're not seeing really, really, really strong moves there thus far.

- Nathan, of course when rates go higher, there are advantages and disadvantages for the banks. Does it make a difference to them if rates-- if, say, the Fed raises rates by 100 or by 75 basis points at its meeting, is there, from a bank business perspective, is there a big difference?

NATHAN STOVALL: Sure. Speed definitely matters. One of the things coming in to this rate hike cycle, the real question mark was going to be what happens to funding costs? You can sort of get to what the number is going to be on the asset side of the balance sheet. That's sort of just simple math. But banks set their deposit rates. And it was expected with the Fed moving more quickly, that you would see those deposit rates raise faster than you would have otherwise.

And we've heard from a few management teams, you've sort of seen a mixed bag thus far. Banks have pretty much done a good job in terms of holding the line. But PNC today missed their margin expectation and guided to higher deposit costs going forward, in part because of the Fed raising at a quicker pace. So if they go 100 versus 75, that would put more pressure. It limits their ability how much they can actually lag the increase in rates, for sure, so faster is harder for them.

- Which bank stock, Nathan, do you think will perform the best in a recession?

NATHAN STOVALL: Whoever has been the most careful from an underwriting standpoint, whoever has been the most cautious. And I would be most fearful of folks who are tied to markets related businesses. I mean, when you talk about Main Street and those who are tied the most to the consumer, the consumers are in pretty darn good shape and still maintains really, really strong balance sheets. And we've heard that from bank management teams thus far this quarter and over the last few months.

Household debt to income levels are at 40 year lows. Consumers accumulated $2.6 trillion in excess savings during the pandemic. And so they have a pretty big cushion there. So I feel better about banks who have more exposure to Main Street than those who've lent more in the capital markets where we're seeing more stress there.

- Reading between the lines, I'm going to say regional banks then is what the implication is. Nathan Stovall, thanks for being here, S&P Global Market Intelligence Principal Analyst talking to us about some of those bank earnings.