Loan losses mount for US banks

This is an audio transcript of the FT News Briefing podcast episode: ‘Loan losses mount for US banks’

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Marc Filippino
Good morning from the Financial Times. Today is Monday, July 10th, and this is your FT News Briefing.

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Israel will start voting on its controversial judicial reforms today. And US borrowers are feeling the pain from interest rates that’s expected to come across as banks report quarterly earnings this week. Plus, manufacturers who don’t want to deal with China are flocking to a nearby country instead, Vietnam. I’m Marc Filippino, and here’s the news you need to start your day.

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Israel’s parliament is set to start voting on a move that would weaken the country’s Supreme Court. Prime Minister Benjamin Netanyahu wants to remove the court’s ability to strike down government decisions. Netanyahu put the measure on ice back in March after protests rocked the country. Now a major Israeli shopping centre chain has threatened to temporarily shut its doors if the bill passes the first of three required parliamentary readings on Monday. The chain is called the Big Shopping Centers, and it has 24 sites around the country. It called the vote for judicial reform, “another step towards dictatorship”.

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Big US banks are reporting their second-quarter earnings this week. They’re expected to show their biggest jump in loan losses since the beginning of the pandemic. We’re joined now by the FT’s US banking correspondent Stephen Gandel to explain what’s going on. Hey, Stephen.

Stephen Gandel
Hi. Thanks for having me again.

Marc Filippino
So why are these loan losses expected to be so high?

Stephen Gandel
Well, consumers are starting to see the impact of higher interest rates and a slowing economy. Plus, all that pandemic cash that came in from the government and other assistance programs, that’s all run out. And so people have worked through their savings. They’ve continued to spend, in part because inflation’s high and just the regular expenses cost more. Now that interest rates are higher on those credit card bills, that’s all eating into people’s ability to pay back their debts. And the banks are starting to see that.

Marc Filippino
Now, besides these loan losses, what else are you expecting to see in these earnings reports?

Stephen Gandel
We’ll see that banks are paying slightly higher interest to savers. Banks are still on the positive end of this kind of trade-off between we pay them higher interest rates, they pay us a little more for our savings accounts. So banks are still making the better of this deal with customers. The other thing we see is a little bit of weirdness, the unrealised losses in their bond portfolios of the big banks. This was the thing that sunk Silicon Valley Bank, right? It had taken all of its extra deposits that it wasn’t lending out and put them into bonds and then lost a lot of money when interest rates went up. Well, interest rates rebounded a bit in the second quarter. It doesn’t hurt earnings. These are unrealised losses, things that banks, unless they’re going to do a lot of pressure like Silicon Valley, they don’t have to sell. But it’s another thing to keep an eye on in case interest rates stay high for a long time. And some banks actually do need this money.

Marc Filippino
Based on everything we’ve covered so far in this conversation, how would you describe the state of US big banks right now?

Stephen Gandel
It’s pretty good. It remains pretty good. I mean, there are concerns on the horizon. The loan losses are growing for the first time in a while. The other thing which we haven’t talked about for the big banks . . . dealmaking is still pretty slow. The Wall Street businesses that used to even out the lending side when loan growth wasn’t there. So in all, profits are up and analysts expect that profits for the big banks will rise in the high single digits this quarter. But they also see a lot of things on the horizon that indicates they, like the regional banks already, will face some profit problems down the road.

Marc Filippino
Stephen Gandel is a US banking correspondent for the FT. Thanks, Stephen.

Stephen Gandel
Thanks for having me on.

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Marc Filippino
UK chancellor Jeremy Hunt will address business leaders today in his Mansion House speech and to lay out reforms channelling billions of pounds into high growth companies. The plan would have Britain’s biggest pension companies voluntarily commit 5 per cent of their investments into private equity and early-stage businesses. The reforms would potentially unlock up to £50bn by 2030. Sources tell the FT that most of the defined contribution pension market would be covered by the pact. Hunt says the reforms will seize the benefits of Brexit and make UK capital markets more attractive.

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Global manufacturers are shifting business out of China. They’re trying to protect supply chains from geopolitical tensions and the risks highlighted during Covid lockdowns. A lot of manufacturers are going to Vietnam, where last year foreign investment reached its highest level in a decade. The FT’s deputy Asia news editor Orla Ryan has more.

Orla Ryan
China is such a massive part of the global supply chain. It’s not that people are upping sticks for good, but they’re thinking, well, we’re going to have a factory in China to serve the vast Chinese market. But when you’re thinking of sort of the rest of the world, it’s useful to have a factory outside of China. It’s very close to China. Part of the reason that the proximity is attractive is that China has very deep supply chains, and that is something that Vietnam doesn’t necessarily have yet. So some companies move there with their own suppliers, others quite like being close to China so they can still use the same suppliers.

Marc Filippino
Vietnam has cheaper labour costs and doesn’t have the kind of geopolitical risks that China does.

Orla Ryan
Vietnam is perceived really as a very stable state. It’s a single-party state. It’s run by the Communist Party of Vietnam. You know, it has good relations with the US. It’s the US’s one of its biggest trading partners. It manages its relationships well with China. I mean, the challenge for Vietnam, the thing that it’s seen as doing quite well, is sort of balancing all these relationships as it takes investment.

Marc Filippino
Orla recently went to Vietnam, and she says global companies do have some concerns about operating in the country, like issues with the country’s infrastructure.

Orla Ryan
This came up sort of quite a lot, and I think power cuts was high, particularly manifested itself while I was there. I think I even had a few meetings where people turned off the lights to conserve power. If you’re an investor, you’re looking to move to Vietnam and you arrive and you sort of see the issue with power cuts. You know, it could give you pause. I guess the bigger takeaway would be like, if this is to be sustained, then more investment in infrastructure will be needed.

Marc Filippino
Orla Ryan is the FT’s deputy Asia news editor.

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Before we go, it looks like Japan is falling out of love with coins. According to the Bank of Japan, the national stock of coins has been falling for 18 straight months year on year. Prior to that, the number of coins had been rising since 1970. That’s right, more than 40 years. In case you’re curious, the ¥500 coin has seen the steepest drop in circulation, which is bad news for kids. The ¥500 coin is the most common coin given to children in Japan to put in their piggy banks.

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You can read more on all of these stories at FT.com. Just a reminder that this summer, the stories we mentioned in the briefing are free to read. You can find the links in the show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.