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BARCLAYS: CAN BANKS' "GOOD AS IT GETS" ENVIRONMENT PERSIST?

With the earnings reports from heavyweight technology and technology-adjacent companies about to begin in earnest this week, Barclays took a look back at banks, which kicked off this quarter's earnings season last week with strong results.

Barclays analyst Ajay Rajadhyaksha found a lot of positive things to say about the major U.S. bank earnings season, starting with the fact that every one of them beat expectations and that "not one missed."

He pointed to booming capital markets activity and investment banking fees that rose by more than 25% year-over-year, which was the highest growth rate for the top five banks since 2021. In capital markets he pointed to the boost from trading volatility due to the Iran war and the AI trade and for investment banking he highlighted the SpaceX IPO, which brought in fees for the banks involved that were a record high from a single listing.

"Across Wall Street, the mood is buoyant," Rajadhyaksha wrote.

But then he cautioned that, "If you read the earnings carefully — the loan books, the charge-off data, the reserve builds, and especially the CEO commentary — the banks are also telling you that they aren’t sure how long it will last."

On lending, the analyst wrote that "loan demand is mediocre. NII is growing on price, not volume. The banks are making more money on each dollar they lend, but they are not lending dramatically more dollars."

Then he cited Bank of America BAC.N CEO Brian Moynihan talking about "resilient" consumers. However, the analyst noted that second-quarter results did nothing to dispel worries about a K-shaped economy where wealthier consumers drive spending and the lower-income consumers are vulnerable.

He pointed to a lower expected card charge-off rate from JPMorgan Chase JPM.N, "which suggests the consumer credit cycle is better than feared" and highlighted Wells Fargo's report that "consumer spending is higher, charge-offs and delinquencies lower, and savings and investments are growing."

But while "the American consumer looks solid" at the surface, Rajadhyaksha noted that "the lower-income consumer is less happy" with serious credit card delinquency rates, measured as 90 days or more past due, "still near a 15-year high (though they have plateaued)." And that overall credit card delinquency is above pre-pandemic levels.

"These are not crisis numbers, but they are elevated and sticky," he said.

As for the tone from executives, the analyst described it as "uniformly strong on the present, but a bit more cautious about the future."

For example, he referenced JPMorgan CEO Jamie Dimon's caution about risks "shifting below the surface like tectonic plates" and his listing of these risks as geopolitical tensions, sticky inflation, large global fiscal deficits, and elevated asset prices.

He noted that BofA's Moynihan called the U.S. economy "more durable than expected" while Goldman Sachs CEO David Solomon "focused on the forward pipeline, noting the deals backlog is the strongest in five years."

But then he pointed to a reminder from Charlie Scharf, the CEO at Wells Fargo WFC.N: "Strong environments like this don't last forever, and we see large amounts of capital being deployed by both banks and non-banks across a broad range of risk assets."

With high profile companies such as Alphabet GOOGL.O and Tesla TSLA.O due to report results this week, it will be interesting to see how the season progresses.

(Sinéad Carew)

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