Banks serve as bellwether

Over the past several weeks, the largest US banks have released earnings best described as “not that bad”—kinda like when you study for a test 30 minutes before taking it and still end up with a B. While second-quarter profits were down at the largest banks in the US, lending (or borrowing) was up for Bank of America, and JP Morgan Chase & Co., meaning that consumers continue to spend.

Since the Federal Reserve raised interest rates by 75 basis points in June, analysts have hawkishly awaited bank earnings to indicate how the macro US market will perform for the remainder of 2022, as banks have portfolios that touch nearly all sectors of the economy.

Even though banks’ earnings were rosier than analysts expected, there’s still plenty of chatter about a possible recession, although not always on the banks’ official earnings calls.

“There are very good current numbers taking place. Consumers are in good shape. They’re spending money. They have more income…Businesses, you talk to them, they’re in good shape…we’ve never seen business credit be better ever in our lifetimes, and that’s the current environment,” JPMorgan Chase CEO Jamie Dimon said on the company’s earnings call. Dimon warned that “the future environment, which isn’t that far off, involves rates going up, maybe more than people think because of inflation.”

At the company’s investment day conference in June, however, Dimon was a lot more gloom-and-doom, saying there were “big storm clouds” on the economic horizon. Analysts poked at Dimon on the Q2 earnings call asking if he believed there was a storm coming, why the company was (metaphorically speaking) out “buying kayaks, surfboards, wave runners,” in a reference to the bank’s $77 billion expense guidance.

Bank of America’s CEO Brian Moynihan was equally optimistic about current numbers, telling analysts that despite the worries of a slower economy and other global issues, “our customers’ resilience and health remains strong.” The bank reported consumer spending remained significantly above pre-pandemic levels.

But, like JP Morgan, the bank’s leadership was hesitant to peer too far into the future. When analysts asked about net interest income (NII), a profit metric that the market keeps a close eye on, both the CEO and CFO hedged slightly in their replies—CFO Alastair Borthwick hesitated to make any Q4 remarks saying, “It’s just a little early to say with that kind of precision” given that there is “a lot going on right now in the markets.” Multiple analysts asked if the bank was merely planning to “underpromise and overdeliver,” a strategy BoA has garnered a reputation for.

Banks are also ready to point the finger at the Fed for any downturn—Wells Fargo’s CEO Charlie Scharf said the Fed’s aggressive rate-hike cycle “continues to fuel market volatility and is expected to slow the economy,” to analysts at the bank’s earnings. Scharf had said in June that the economy isn’t ready for such aggressive rate hikes.

Fine, tell me the bad news. While banks are often eager to present the rosier sides to analysts, once the quiet period ends, CEOs have been seen on TV speaking of a grimmer future. Goldman Sachs CEO (and part-time DJ) David Solomon appeared on CNBC saying that the company expects a recession and will slow hiring, while just days earlier on the earnings call, the only executive to mention the word “recession” was CFO Denis Coleman, and he said only that the company has modeled the possibility, versus actually planning for one.

So, is 2022 doomed? Morgan Stanley wrote in its earnings guidance for the banks that while they have been able to offset bigger ticket surprises, inflation will challenge executives’ ability to shift around headwinds with other business tailwinds in the future.

“Banks could be more resilient than investors fear in a downturn,” Erika Najarian, managing director and equity research analyst, large-cap banks and consumer finance at UBS, told CFO Brew in an email. “Unlike in the global financial crisis, banks have the balance sheet capacity and strength to continue lending to qualified borrowers if other sources of funds (capital markets, nonbanks, fintech) are squeezed by higher rates and higher defaults.”

And, when analysts asked Wells Fargo to peer into the “crystal ball” that is the rest of the year, Scharf said they are looking at “opportunities to become more efficient,” often corporate speak for leaner, more risk-averse operations and perhaps a little bit tighter on spending.

“Right now, the key is to keep things simple.” Brian Trzcinski, director of business market development at MassMutual told CFO Brew in an email. He said every business will need to “focus on the areas of the business that are necessary for its long-term health. The key areas of focus are: employees, cash flow, and operations.”—KT