U.S. markets close in 22 minutes
  • S&P 500

    4,304.75
    +7.61 (+0.18%)
     
  • Dow 30

    34,149.18
    +236.74 (+0.70%)
     
  • Nasdaq

    13,100.59
    -27.46 (-0.21%)
     
  • Russell 2000

    2,018.54
    -2.81 (-0.14%)
     
  • Crude Oil

    86.26
    -3.15 (-3.52%)
     
  • Gold

    1,791.50
    -6.60 (-0.37%)
     
  • Silver

    20.11
    -0.16 (-0.80%)
     
  • EUR/USD

    1.0167
    +0.0002 (+0.02%)
     
  • 10-Yr Bond

    2.8240
    +0.0330 (+1.18%)
     
  • GBP/USD

    1.2089
    +0.0030 (+0.25%)
     
  • USD/JPY

    134.2210
    +0.9490 (+0.71%)
     
  • BTC-USD

    23,933.86
    -95.48 (-0.40%)
     
  • CMC Crypto 200

    568.33
    -3.58 (-0.63%)
     
  • FTSE 100

    7,536.06
    +26.91 (+0.36%)
     
  • Nikkei 225

    28,868.91
    -2.87 (-0.01%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Bank earnings: Strategist details 3 major trends from results so far

In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

RBC Capital Markets Gerard Cassidy joins Yahoo Finance Live to discuss big bank earnings, major market trends, and the outlook for investment banking.

Video Transcript

JULIE HYMAN: It has been a mixed picture for bank earnings this quarter amid rising rates and market volatility, a drop in investment banking revenue. Bank of America and Goldman Sachs are the latest addition to this mixed bag of earnings, although both of them are trading higher. For more on what all of this is reflecting about the banking sector and financials, let's bring in Gerard Cassidy, RBC Capital Markets Head of US Bank Equity Strategy and large cap bank analyst. Gerard, I guess let's start very high level and sort of what your big theme takeaways are from the companies that we've heard from.

GERARD CASSIDY: Sure, Julie. Thank you for having me on. I would say number one, rising short-term interest rates has been very beneficial to the banks. You saw that today with Bank of America's numbers, where their net interest margin and net interest income grew materially from a year ago. They also gave guidance that that number will continue to grow in the second half of the year due to rising rates.

The second big trend, however, has been the weakness in investment banking. On average, all of the large investment banks have already reported, with the two today. And the investment banking revenues are down year over year about 50%, led by a very, very weak equity capital markets business, which, of course, is tied to initial public offerings and follow-on offerings. Then the third big trend is credit quality. It's a concern that many investors have in investing in banks as we head into a slowdown. And credit quality across the board was very strong for all the banks that have reported thus far.

- And so for some of the banks that have already started to come out, I mean, even when we were looking at Goldman Sachs results, it was still on some of the expectations that were largely lowered here. And so going forward from this point in time, even in a rising rate environment, what tone would you expect the banks to continue to strike to really give some sense of how they're navigating a potential recession as well as that of their end consumers and businesses?

GERARD CASSIDY: No, it's a good point because expectations now in the investment banking business, I think, have been lowered quite dramatically for all of the big players. So even as we go into a slowdown, if you come back to, again, the ECM business, when you annualize out the revenues, we're running now at levels that we haven't seen since the early 1990s. And we expect, if business does not pick up, that you're going to have to see some cost cutting. And Goldman Sachs alluded to that on their earnings call.

When it comes to the traditional commercial banking businesses, which are obviously completely different than investment banking and trading, it's really going to come down to loan growth, margin expansion, and then the management of credit. And as we pointed out, you know, credit quality coming out of the pandemic has been remarkably strong, much better than we've seen in decades.

And just even if we don't have-- even if we don't have a slowdown or a recession, the delinquency numbers naturally are going to rise because they're just at unsustainably low levels. So as we go forward, it's going to be interesting to see how the market interprets the rise in delinquencies just due to natural causes, if you will. But again, we don't expect it to be anything like what we saw in 2008 or '09. And some investors, I think, do feel that could happen, which is why they're staying on the sidelines.

BRIAN SOZZI: You mentioned cost cutting, Gerard. How severe do you think the layoffs on Wall Street will be?

GERARD CASSIDY: That's the $64,000 question. It's really going to come down to what the outlook is for 2023. So we'll take a look probably in the fourth quarter, when the companies take a real hard look internally. I would think that, you know, the relationship investment banking positions are going to remain in place, and it really comes down to the production side. As you know, let's look at the SPAC business.

You know, the ECM business and SPACs has been nonexistent this year. And so do you really need an entire SPAC department that many of the banks built up in 2022-- or, 2021 to handle that enormous volume we had in the first quarter? So I think when it comes, should it come, it's probably going to be very focused on the ECM business, which has been extraordinarily weak this year.

- So just to follow up on that, what percentage of the workforce do you believe that industrywide might be impacted?

GERARD CASSIDY: That's a hard question to answer, but it's the right question to ask. And it's-- and it's tough. You know, is it a 5% number, or is it a 10% number? It's hard to say because it's not going to be across the board, of course. It's only going to be in the areas where they feel they're overstaffed for the eventual recovery. And that's the point that also needs to be made.

We're not likely to stay at these depressed levels, just like we were not expecting to stay at the elevated levels we saw in 2021 in the investment banking business. So now the pendulum has swung entirely to the other direction, and it's not going to stay here. It will recover. It may take a little while. But in the meantime, that means they have to sharpen their pencils on expenses. And it's hard to really identify whether a 10% staff cut is the number that needs to be achieved or something higher or something lower.