Big banks reported a strong first quarter but are still bracing for economic downturn
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Big banks reported a strong first quarter but are still bracing for economic downturn
Some of the country’s biggest banks have been reporting their first quarter results this week. For the most part, they have done pretty well, considering the past three months included the sudden failures of Silicon Valley Bank and Signature Bank.
But there are signs the sector is bracing for an economic downturn in the months ahead.
The big banks are doing just fine, says Mike Mayo, managing director at Wells Fargo Securities.
“The bank earnings so far could be described as Goliath is winning,” said Mayo.
The four biggest banks — JP Morgan, Bank of America, Citigroup and Wells Fargo — all saw their net incomes rise in the first three months of the year.
In other words, Mayo says … what banking crisis? “The one to two week contagion has probably been contained,” explained Mayo.
But there are some warning signs, especially for smaller, regional banks, where deposits are down, says Kent Belasco at Marquette University.
“If they lose deposits, they’re losing a funding source. And they have to look at other avenues for funding and liquidity, which could be more costly for them,” said Belasco.
As consumers watched the sudden failures of Silicon Valley Bank and Signature Bank, they moved their deposits to money market accounts and other banks. And, they’re withdrawing from their savings as they face inflation.
Belasco says earnings reports also tell us where banks think the economy is headed.
“And most of the banks are probably of the mind that we’re heading into a recession,” said Belasco.
We know that because banks are building up their reserves — known as provisions for credit losses. They’re seeing recent layoffs in tech and media and they’re preparing to cover for borrowers who might default on loans, says Mayra Rodriguez Valladares, managing principal of MRV Associates.
“Because some of those people who lose their jobs aren’t going to be able to pay their credit cards on time, or they may not be able to pay their mortgages,” said Rodriguez Valladares.
And she says, with the Fed keeping interest rates relatively high to tame inflation, there’s a decent possibility that unemployment will rise later this year … which makes it a good idea for banks to get ready for more loan defaults.
“They really do need to get ready for that impending rainy day,” Rodriguez Valladares.
So even while recent earnings show the banking sector seems to have weathered one storm, Valladares says don’t let that lull you into thinking the economy is in the clear.
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