• US banks are starting to see benefits of rate rises and have raised their guidance for net interest income. Consumers are also in good shape, with improving credit card spending as economic re-opening gained
momentum.
• Trading income surprised on the upside, while investment banking revenues fell substantially since the war in Ukraine started. Some provisions were taken in 1Q22 as pre-emptive moves.
• Asset quality trends should remain benign near term although macro risks have risen and rate expectations are already high. Watchful for risks ahead which could include a potential increase in
recessionary worries into 2023 and disappointment in the higher rate narrative if the growth outlook deteriorates, which could trigger further profit taking pressures in the sector.
• Favour a selective approach for fresh positions and advise investors sitting on outsized positions or names that are closer to fair values to exercise discipline and lock in some gains.
Most United States (US) banks have released mixed 1Q22 results. A key positive observed from the latest
earnings release is that US banks are starting to see the benefits of higher rates ahead and have raised
their net interest income (NII) guidance following the Federal Reserve’s (Fed) more hawkish stance. Trading revenues across fixed income, currency and commodities (FICC) and equities have surprised on the upside with relatively low single-digit declines from banks such as Citigroup and JPMorgan. Loans growth and credit card spending trends were also brighter spots in the latest results releases, aided by economic re-opening and reflecting healthy US consumer spending trends.
On the other hand, various management teams (such as Citigroup, Goldman Sachs and JP Morgan) have also warned of higher tail risks ahead and taken provisions due to Russia related exposures. Investment banking (IB) revenues were fell about an aggregate of about ~36% from a year ago and have lost momentum since the war in Ukraine started, hit by weaker sentiment amid elevated market volatility. Share buybacks have moderated in 1Q22 (as expected) and banks have signaled for lower buybacks ahead given lower excess capital, optimism for increased loans growth and higher macro risks expected. As highlighted in our earlier sector report (Developed Market Banks – Minimal direct exposure to Russia/Ukraine, watchful for inflationary shocks and rate implications), while banks will benefit from a new rate hike cycle, macro risks and inflation concerns have clearly risen following the war in Ukraine – this will have implications for growth expectations and could in turn lead to a period of softer sector returns.
Since our last sector update, Fed rate expectations, inflation and growth concerns have increased further. Our economist has revised his forecasts and now expects 50 basis points (bps) rate hike in May and June, followed by 25bps hike every meeting until the Fed funds rate reaches 2.75-3% by March 2023. Our house’s base case is maintained that there should not be a recession in 2022-2023 due to support from re-opening tailwinds (Macroeconomics: Fed Minutes – Hawkish again). At the same time, our strategy team has also highlighted that inflation expectations could eventually ease in 2H 2022 and has cautioned
against being overly negative on risk exposure (Investment Strategy: Inflation versus the market). While we retain our constructive sector stance at this point, we remain watchful for any meaningful shift in growth outlook, which the banking sector will be highly sensitive to. We are also cognizant of solid gains already made since our Overweight call on the global financials sector more than a year ago, and potential downside risks should a more bearish scenario of stagflation or recession materialize (not our house’s base case) which will require close monitoring. In this report, we summarise key trends observed in the latest 1Q22 reporting season, which should have some read-throughs for upcoming earnings releases from other global banks. In terms of action calls, we favour a more selective approach and advise investors sitting on outsized positions or names that are closer to fair values to lock in some gains and exercise investment discipline (key names to trim include Cullen/Frost Bankers, Regions Financial Corp and Comerica Inc). Key sector picks are maintained in JPMorgan Chase (quality franchise,
future share gains), Wells Fargo (most rate sensitive of the big four banks, turnaround story) and
Citigroup (trades at more undemanding valuations, turnaround idea which is relatively less dependent
on rates/offers diversification, although patience will be needed). (Research Team)