US banks have seen loan growth slow as the economic outlook deteriorates

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After a decent 2021, in which our US banks basket of stocks saw gains of just under 40% as stocks like JPMorgan Chase and Goldman Sachs hit all-time highs, the top six months of 2022 brought a significant correction. That wiped out a lot of the gains we saw after the pandemic-era lows of 2020.

Morgan Stanley initially bucked the trend, with its shares briefly hitting a record high in February. However, since those peaks, losses in the US banking sector have accelerated, in part due to fallout from the Russian invasion of Ukraine.

Storm clouds collection

It would be easy to argue that events in Eastern Europe were the only catalyst for the declines we have seen so far this year, but in truth the signs were there even as we neared the end of 2021.

Shareholder angst was already apparent during the sharp sale of JPMorgan Chase stock last November over concerns about its consumer business and, in particular, loan growth. The latter had been cited as a concern as early as the second quarter of last year.

A particular issue that affected all US banks last year was the release of reserves they had built up during the pandemic to cover possible loan defaults due to concerns about rising unemployment. The feared level of defaults never materialized, largely thanks to unprecedented fiscal support from the US government that protected jobs and the broader US economy. In many cases, the support may have been too generous. Last year, banks released their provisions for bad debts, increasing short-term payments.

With these one-time balance sheet increases firmly in the rearview mirror and with an economic slowdown looming as the Federal Reserve signaled a change in monetary policy, many investors pulled out of the banking sector.

The weakness we started to see in the sector late last year accelerated after the fourth quarter figures were announced in January. Bank results showed higher costs and lower retail lending, indicating the economy is weakening.

U.S. bank performance – 2022 to date

Source: CMC Markets

Banks faced headwinds in the first half

In January JPMorgan Chase reported a decline in home loans and personal credit in the fourth quarter, as higher interest rates helped push home loan revenue down 26% to $1.1 billion. Revenue from credit cards and auto loans fell 9% to $5 billion.

This is a trend that has been repeated in Citigroup, whose retail business saw a sharp decline in revenue. Services revenue fell to $1.3 billion, while mortgages also fell as costs rose.

April gave us the numbers for the first quarter. Although revenues from the trading and fixed income divisions of U.S. banks held up reasonably well, margins were under pressure. There were many reasons for that. Economic conditions became less favorable as the Federal Reserve tightened monetary policy while Russia upended the global economy by invading Ukraine.

These headwinds prompted U.S. banks to favor safety as they set aside reserves to cover potential credit losses from rising inflation. This increase in provisions coincided with a sharp rise in consumer credit which, after a weak January, exploded in the following three months, reaching a record high of $47.34 billion in March. We also saw increases of $37.7 billion in February and $36.76 billion in April, for a total of almost $122 billion in three months. That’s roughly equivalent to the amount we’ve seen in the last six months of 2021.

Goldman Sachs set aside $561 million in the first quarter to cover credit losses related to the growth of its credit card portfolio. It followed that with an additional $667 million in the second quarter.

JPMorgan Chase also increased provisions for credit losses, adding $1.5 billion in the first quarter and $1.1 billion in the second quarter, as higher prices weighed on consumer purchasing power. Provisions for credit losses appear to be a response to a significant increase in lending, although mortgage lending remained subdued as the bank announced in late June that it planned to lay off or reassign more than 1,000 staff in its mortgage unit .

Bank of America has emerged in recent months as more optimistic about the U.S. consumer and the economy, even if its stock price performance does not reflect that optimism. CEO Brian Moynihan was optimistic about the outlook in April, saying US consumers were still sitting on big bucks. It seems doubtful if credit card loan growth is any guide. But the bank remained optimistic when releasing its second-quarter numbers earlier this month, despite setting aside $523 million for credit losses.

Together, US banks also had to reduce their exposure to Russia, which led to variable costs. Citigroup said it expects to incur losses of $2 billion in the worst-case scenario, setting aside $1.3 billion in the process.

Concerns about the outlook

In anticipation of the rest of the year, JP Morgan warned that the deteriorating economic outlook would likely impact the performance of the banking sector in the future. The bank cited high inflation, geopolitical uncertainty stemming from Russia’s actions in Ukraine and the Federal Reserve’s rate hike in a slowdown.

Consumer spending in the United States is holding up for now, but high inflation could force many people to save in the coming months. Petrol prices have started to fall in recent weeks, easing pressure on consumers’ wallets, although other price pressures – such as food price inflation – could hit shoppers’ pockets as winter approaches.

Everything will depend on the performance of the US economy over the rest of the year. Although we have seen a modest rebound in US bank stock prices over the past few days, we are still in the downtrend that followed the February highs.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not expressing opinions) is provided for informational purposes only and does not take into account your personal circumstances or objectives. Nothing in this document is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically restricted from processing prior to providing such material, we do not seek to take advantage of the material prior to its dissemination.

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