Big bank stocks are generally having a good week, after launching the second-quarter earnings seasons late last week, largely beating estimates for quarterly results. Analysts applauded the positive results. At the same time, financial institutions showed high levels of caution, reporting large set-asides for expected losses from commercial real estate and other segments.
JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley and Bank of America — five of the six largest U.S. banks — topped expectations for Q2 results this past week, largely driven by higher net interest income tied to higher interest rates.
JPMorgan increased its net interest income guidance for 2023 to $87 billion, up $3 billion from its May outlook. Wells Fargo hiked its net interest income forecast for the year, expecting it to rise 14% compared to previous projections of 10% growth in 2023.
"Now that we have seen the results from the big banks, this is a clear beat on all the top line expectations. Better revenues and stronger guidance across the board," Brian Mulberry, client portfolio manager at Zacks Investment Management wrote in a research note following JPMorgan, Wells Fargo and Citi earnings Friday.
"This backs up the clean bill of health that the 'stress tests' showed us 2 weeks ago," he said.
Mulberry also added that losses from higher capital costs were not as bad as feared and Wells Fargo did not see expected damage to its commercial loan portfolio.
"The bottom line impact here is that the overall health of the banking system is better than feared, at least for the largest banks in the system," Mulberry said. "In a David vs. Goliath world, it would definitely seem that Goliath is winning in a big way, but we will see over the next week which of the regionals can still compete within this environment."
Bank Stocks, Office Real Estate Risk
However, the results did show some signs of increased caution. Banks unanimously bolstered their provisions for credit losses, the funds set aside for anticipated losses.
JPMorgan increased its credit loss provisions to $2.9 billion, up 27% from $2.28 billion in Q1 and 62% higher than last year's levels.
Wells Fargo boosted its provisions for credit losses 43% above Q1 levels, to $1.713 billion. That is 195% above the $580 million it reported in Q2 2022. CEO Charlie Scharf noted that the allowance was primarily related to its commercial real estate office loans in the results.
"While we haven't seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out in that market over time," Scharf said in the release. Offices represent about 22% of Wells Fargo's outstanding commercial-property loans, according to Bloomberg data.
Meanwhile, Citigroup raised its allowance for credit losses on loans to $17.5 billion, compared to $16 billion last year. And Bank of America boosted its allowance to $1.1 billion from $900 million in Q1 and 120% above year-ago reserves. Morgan Stanley increased its credit loss provisions by 59% to $161 million.
Roughly $189 billion in U.S. office real estate will need extensions or refinancing in 2023, about half borrowed from banks, according to data from the mortgage Bankers Association compiled by Bloomberg. And U.S. office prices fell 31% through June from their 2022 peak, Bloomberg reported citing data from Green Street.
'Prudent Risk Management'
However, Mulberry believes this is simply a case of big banks being prepared, rather than issuing a warning.
The reserve increases show that big banks expect monetary policy to continue to tighten, and that higher rates will put direct pressure on several important economic areas.
"As the interest load increases we would expect to see more defaults and late payments," Mulberry wrote in a response to Investor's Business Daily. "This is prudent risk management at this point to prepare for the worst until proven otherwise. In this case, these banks will want to see that the Fed has at least stopped raising rates, not just 'paused'."
Bank stocks traded generally higher on Tuesday, with Bank of America up 4.5% after earnings. The SPDR® S&P Regional Banking ETF showed a two-day gain of 6%.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
