The banking industry seems to be taking a cue from the music business. We’re all familiar with plenty of acts featuring “someone” and “the rest of the band”. Bruce Springsteen and the E Street Band, Paul McCartney and Wings, and Bob Marley and the Wailers are three of the first that come to mind. Today’s kickoff to earnings season has me wondering whether the banking industry can fit into that construct as well. It seems to be JPMorgan Chase (JPM) and the Other Banks.
The bank earnings that were released this morning — and the market’s reaction to them – seem to echo that theme. We heard from JPM, Citigroup (C), Wells Fargo (WFC) and PNC Financial (PNC) before the market opened. All beat estimates: PNC and WFC by about 9%, C by about 13% and JPM by about 21%. Around midday we see PNC trading lower by -2.5%, WFC essentially unchanged, C up by over 3% and JPM up an outstanding 7.5%.
JPM is clearly the star of today’s show. A key factor in the rally came as they boosted its full year net interest income to $81 billion from $73 billion. It is clear that JPM benefitted even more than its peers from concerns that arose in the wake of the failure of Silicon Valley Bank (SIVBQ) and others. Money flowed in droves, they paid relatively little for those deposits, and JPM has been able to use it productively. It’s relatively foolproof right now. If they can attract deposits while only paying a few basis points of interest and turn around and lend it to the Federal Reserve via its Reverse Repo Facility at the current 4.80% overnight rate, that’s a really good business model. I’m oversimplifying, but that certainly goes a long way to JPM’s success.
It was logical to anticipate that something like this would occur; the surprise is the extent to which JPM benefitted even more than the other “too big to fail” peers that reported today. This is where JPM’s primacy is most evident. Those who pulled funds from a smaller bank looking for a safer home seemed to have disproportionately sent it to JPM. CEO Jamie Dimon has become one of the faces of the industry, and his bank has become a well-managed flagship. This is how they benefit.
To be fair, Mr. Dimon was relatively diplomatic in his commentary during the earnings call. He was complimentary toward the regional banks whose deposits he received and pointed out that the deposits that flowed in could easily flow back out. He also minimized the likelihood that there are large numbers of troubled banks waiting in the wings. He seemed to recognize that even though his bank benefitted from concerns about smaller peers, it would be unseemly to appear to gloat or foster those concerns. It could be a concern that doing so runs the risk of greater regulatory scrutiny, or simply statesmanship.
(That said, his counterpart in the fund management industry, Larry Fink at Blackrock (BLK), was hardly reticent about crediting the bank woes for higher-than-expected inflows to his market-leading but less regulated organization)
The largest global banks took heart from JPM’s results. We haven’t heard yet from Bank of America (BAC), but they are up 3% on the trends revealed today. A bounce commensurate with C seems about right. We also saw HSBC, Barclays (BCS), UBS (UBS) and Societe Generale all jump shortly after 6:45 EST, which was when JPM’s results were released. The specifics of each of those banks is a bit different than the largest US banks, but the takeaway is that size has its benefits to a large bank’s bottom line.
It’s not all good news for banks, though. PNC is trading lower because their net interest margin fell because of higher funding costs. We noted this concern earlier this week, We will learn next week to what extent this is a pervasive problem among the next tier of banks.
But today is all about JPM and its backup band, the rest of the world’s biggest banks.
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