Fewer swaggering bankers, more dull mortgage advisers please. That has been the message for Wall Street’s bulge-bracket banks this year. It will not protect against drab results, as the third-quarter earnings season that kicks off next week is likely to show.
Investors have cheered banks with strong retail banking operations and left behind those without. Shares in Bank of America, Citigroup and JPMorgan are up between 13 per cent and 30 per cent this year. Even Goldman Sachs, long a symbol of cut-throat trading, has been rewarded for its pivot into consumer services, credit cards and transaction banking, with the stock up over 18 per cent.
But Main Street banks are set for harder times. The US Federal Reserve has cut interest rates twice since July, when banks last reported their results. It is expected to do so again this month. Falling long term rates are squeezing net interest income (NII) — the money banks make from the difference between deposit rates and loan rates. NII accounted for more than half of the biggest lenders’ revenues last year.
Loan growth may be slowing, particularly from the commercial side. Trade war jitters and slowing global growth are prompting companies to hold off on capital expenditures. Top brass from JPMorgan, Wells and Citi are among those that have tempered their outlook for net interest income. Analysts at KBW expect NII to fall 2.1 per cent for the median bank.
The picture is not much prettier on the trading and investment banking front. Trading volumes remain in the doldrums and the choppy environment has resulted in IPOs being pulled. This is one reason shares in Morgan Stanley and Goldman trade at a discount to JPMorgan and BofA on a tangible book value basis.
Attractive dividend yields, a shift towards value stocks and massive share buybacks should help support bank shares in the short term. But risks are rising. If the economic cycle suddenly turns, even the strongest of Main Street’s banks will look overvalued.
If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.
Get alerts on US banks when a new story is published