Takeaways from banks’ second quarter results

Investors have been sifting through the first batch of corporate earnings this quarter to monitor recession risks, the state of consumer spending and the outlook for markets. Reports from the nation’s largest banks at the start of “earnings season,” as Wall Street calls it, sent mixed signals.

Second-quarter profits for all banks were down from a year earlier. The last two to open their accounts were Bank of America, whose quarterly profits fell by a third, and Goldman Sachs, whose profits fell by half.

But in some cases, the decline in earnings has not been as severe as analysts expected. Consumers continued to spend and borrow. Markets were volatile, but there was money to be made in trading. And bank executives struck a cautious tone, but none believed a recession was underway.

“It’s a tough market, but I think it’s important to say it’s not tough in 2008,” Morgan Stanley chief executive James Gorman told analysts.

Bank chiefs said they expected the economy to slow but not slide into outright contraction.

“Nothing in the data that I see indicates that the United States is on the verge of a recession,” said Jane Fraser, chief executive of Citigroup, during a conference call. “While a recession may indeed occur, it is highly unlikely to be as severe as others we have seen.”

JPMorgan Chase executives also said there were no clear signs of a recession yet. Retail banking customers are still spending money on discretionary purchases like travel and restaurants, they said.

“We looked at our actual data very carefully,” JPMorgan chief financial officer Jeremy Barnum said in a call with reporters. “There is essentially no evidence of any real weakness.”

Michael Santomassimo, Wells Fargo’s chief financial officer, said the bank’s management was preparing for a series of scenarios, but signaled that “things are likely to get worse.”

Loans increased at almost all banks, a positive sign for the economy. Consumers and businesses increased their borrowing from the biggest banks by an average of 6% in the second quarter compared to the same period last year.

The biggest gains were in business loans, which were up nearly 20% from a year earlier at JPMorgan and Bank of America. Residential mortgage lending slowed in the quarter, due to rising interest rates, but was still up at most banks. And for the most part, consumers and business customers continued to pay their debts on time. For example, at JPMorgan, only 0.5% of customer credit card loans were 90 days or more past due.

Almost all banks, citing economic uncertainty, said they expected an increase in the number of borrowers, especially individuals, who would fall behind on their loans. The six largest banks collectively expect nearly $2 billion more in loan losses in the coming year than three months ago.

Most investors lost money in their investment accounts in the second quarter, but market volatility was a boon for banks. This was especially true at Goldman Sachs, where trading revenue rose 31%, outpacing rivals. Citigroup also announced better-than-expected results thanks to higher trading commissions and market gains.

In the wake of the financial crisis a decade ago, big banks, prompted in part by regulators and changes to legislation, pledged to avoid making risky bets in the market. Today, many of them derive an increasing share of their income from trading, even though banks still claim that they take less risk than before.

Comments are closed.