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US bank shares jump on interest income and deals optimism, but outlook mixed

Published 07/18/2023, 12:04 PM
Updated 07/18/2023, 05:17 PM
© Reuters. FILE PHOTO: A man uses an ATM machine next an inflatable plastic balloon inside a Bank of America branch in Times Square in New York, U.S., August 10, 2019. REUTERS/Nacho Doce/File Photo

(Reuters) - Big U.S. banks on Tuesday said higher interest rates had helped boost profits in the second quarter, causing shares to spike, but a pullback in consumer spending, slower loan growth and increased deposit costs may cloud the outlook for the sector.

Signs of a revival in investment banking, which has been in the doldrums as higher rates and economic uncertainty put a damper on deals and trading, also drove share gains, with Morgan Stanley (NYSE:MS) on Tuesday predicting an uptick in spots of M&A.

Bank of America (NYSE:BAC) and Bank of New York Mellon (NYSE:BK) Corp, two of the country's largest financial institutions, earned a windfall from charging clients higher interest rates as the Federal Reserve raised borrowing costs to rein in stubborn inflation.

Bank of America's net interest income (NII), which measures the difference between what banks earn on loans and pay out on deposits, rose 14% to $14.2 billion in the second quarter, helping it to beat Wall Street estimates. The bank said it expects full-year NII to be up about 8% at about $57 billion.

NII gains also helped drive a better-than-expected performance in BoA's global markets business, which was also boosted by a strong performance in trading.

BNY Mellon also beat analyst estimates thanks to a 33% rise in NII, to $1.1 billion, while PNC Financial (NYSE:PNC) Services, a major regional lender, reported a 15% jump in NII to $3.51 billion for the second quarter.

BNY Mellon's full-year NII outlook remains unchanged at 20% growth, Chief Financial Officer Dermot McDonogh told analysts.

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That was in contrast to U.S. custodian bank State Street (NYSE:STT) warning on Friday of a further decline of 12-18% on NII on a sequential basis, driven by lower deposit levels. Deposits at large banks have been dropping as consumers move money in search of higher yields.

"Net interest margin seems to be somewhat increasing and the earnings seem to be good," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, but added some investors were waiting on earnings from more regional lenders, which experienced turmoil earlier this year, to get a better picture for the overall banking sector outlook.

M&T Bank (NYSE:MTB), Citizens Financial (NYSE:CFG), US Bancorp (NYSE:USB), Zions Bancorp and Discover Financial all report on Wednesday.

"A lot of people are just waiting for a little bit more on the earnings front," said Pavlik.

Shares in BofA and BNY closed up more than 4% on Tuesday, while the 6.5% jump in Morgan Stanley's shares was the biggest daily percentage gain since Nov. 9, 2020.

The S&P 500 Banks Index closed up 1.9% and the KBW Regional Banking Index jumped 4% to finish at its highest level since March 22.

JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) likewise said on Friday profits rose on higher rates and painted a picture of a resilient economy, but also warned of risks with U.S. consumers spending less and loan growth expected to slow.

Those warnings were echoed on Tuesday by PNC, which cut its forecast for full-year NII growth to 5% to 6% in 2023, compared with its previous forecast of 6% to 8%. That decline is due to modestly lower loan growth and slightly higher deposit costs.

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The results follow a tumultuous first quarter in which a banking crisis, triggered by the collapse of Silicon Valley Bank, led panicked consumers to yank deposits. That has forced some banks to offer consumers higher returns.

Charles Schwab (NYSE:SCHW) on Tuesday said its NII had slumped 10% to $2.29 billion in the second quarter, as some clients have been moving cash to alternatives that fetch better returns.

Still, Schwab's stock closed up 12.6% on better-than-expected earnings and guidance that daily cash outflows were slowing, while PNC finished 2.5% up.

DEALS HOPE

Wall Street titan Morgan Stanley also reported on Tuesday, with profits falling 14% from a year earlier as a dealmaking and trading slump continued.

Sluggish deals have been a sore spot across Wall Street with global investment banking activity plunging to $15.7 billion in the second quarter, the lowest since 2012, according to Dealogic.

But investors were cheered by Morgan Stanley's positive outlook for M&A, with Chief Financial Officer Sharon Yeshaya telling Reuters that investment banking was expected "to lead the recovery in the next quarter."

M&A is picking up in industries such as financials and energy, and the bank's backlog of deals is growing, she later told analysts.

While investment banking and trading were also a drag on earnings for big banks on Friday, JPMorgan likewise said the bank was seeing “green shoots” in the business.

Goldman Sachs (NYSE:GS), a Wall Street deals powerhouse, reports earnings on Wednesday.

Still, some executives sounded a note of caution, with Citi's CEO Jane Fraser on Friday noting the bank had a strong investment banking pipeline but that the long-awaited rebound "has yet to materialize."

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(This story has been refiled to add the dropped 's' in Zion's in paragraph 10)

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