(News Bulletin 247) – Four months after the bankruptcy of Silicon Valley Bank, the results of American banks, published from Friday will be closely watched. This earnings season promises to be tricky with performances that should be “contrasted”, predict the experts.

The spring storm in the US banking sector seems to be a distant memory but second quarter results, published from Friday, should illustrate, according to experts, increased caution among banks with a jump in provisions for bad debts in the face of rising Fed rates and inflation.

The American central bank has in fact carried out ten consecutive rate hikes since March 2022, which now stand in a range of between 5% and 5.25%.

At its last meeting in early July, the Central Bank Monetary Committee (FOMC) decided to take a break but has no intention of stopping. At least two additional increases should still occur.

This rise, combined with high inflation (record 9.1% in June 2022) – now curbed thanks to the action of the Fed (4% in May 2023) -, leads in its wake to an increased number of defaults. in the repayment of loans, in particular real estate. June inflation is due out on Wednesday.

According to the specialized company Attom, mortgage foreclosures jumped over one year by 22% in the first quarter of 2023 and by 6% compared to the previous quarter.

Analysts, like Chris Wolfe of Fitch, therefore expect a jump in provisions for bad debts at the big banks. With questions about the consequences for the payment of dividends and share buybacks.

“Contrasting” performance

On the results side, the performances should be “contrasted”, agree to say the experts. For Kenneth Leon, director of research at CFRA, JPMorgan and Wells Fargo should record an increase in their turnover over one year while that of Bank of America, Citigroup, Goldman Sachs and Morgan Stanley should remain stable or even decline.

According to him, consumer credit and indebtedness via credit cards will be particularly scrutinized “to assess the health of the American economy”. The level of household savings, which reached a record 24.9% in May 2020 during the pandemic but fell to 4.6% three years later (historical average close to 6.5%), will also be considered, he said.

For Wedbush analysts, this season of banking results will be “delicate”, marked in particular by downward revisions to net interest income (difference between interest received on loans granted to customers and interest paid to savers and to creditors).

“We expect net interest income to come under more pressure as banks shift their balance sheets toward more liquid assets,” they noted.

Same expectation for Eric Compton, an analyst at Morningstar, given the rise in the cost of remunerating deposits that banks are trying to attract at all costs to have fresh cash. Efforts partly facilitated by the bankruptcy in March of Silicon Valley Bank (SVB).

A “significant” consolidation of regional banks?

The fall of this regional bank and the shocks it caused in the sector – the bankruptcy of Signature and First Republic, and the last-minute bailout of Credit Suisse in Europe – in fact prompted many Americans to transfer their deposits to establishments considered safer. The quarterly results should shed light on the scale of the phenomenon, already visible in the first quarter.

This spring crisis could also cause a “significant” consolidation of regional banks and medium-sized banks “but everything will depend on what the regulators allow”, underlined Mr. Wolfe.

US Treasury Secretary Janet Yellen seemed permeable to this idea: “Certainly we don’t want over-concentration and we are pro-competition, but that does not mean no” merger, she explained at the end of June to the Wall Street Journal business daily.

One way to avoid a wave of mergers would be to provide more reassurance about the solidity of institutions within their current scope.

The Fed unveiled recommendations on Monday to strengthen the capital of medium-sized banks, wishing to lower the cursor to 100 billion dollars of assets against 700 billion currently for these new rules which should not come into effect until “in several years at least”.

(With AFP)