Boring banking is exciting again in the United States

Boring banking is exciting again. The stars of the first quarter earnings season of the major US banks were not very powerful market traders, brilliant bond traders or corporate finance wizards. These were wickets, mobile applications and credit cards.

As investment banking and capital markets operations stumbled, retail units pushed profits up. At JPMorgan Chase and Bank of America, bank deposits and loans increased and lines of credit widened. Retailers' net interest income increased 11% at Chase and 10% at BofA to $ 9.4 billion and $ 7.1 billion, respectively.

Growth of Wells Fargo and Citigroup was not as strong – Wells still manages the fallout from the shadow account scandal, and the Citi card business in the US has struggled – but the retail trade remains a source of stability as institutional banking activities collapsed.

"Look at the different activities of banks – corporate and investment banking is not a source of growth, nor badet management [either]. All growth comes from retail banks, "said Charles Peabody of Portales Partners.

Over the past two years, 80% of revenue growth [for banks] was net interest income, of which 80% came from rate hikes

Investor enthusiasm for stable retail banking activities is reflected in the performance and valuation of bank stocks.

In the last 12 months, the shares of Morgan Stanley, which has no retail units, and Goldman Sachs, which has only a tiny one, are the worst performers of the six major US banks, falling respectively by 11% and 21%. . Conversely, JPMorgan and BofA, which own the strongest retail units, trade the widest premiums against the group's book value.

The question is whether the retail bank's moment in the sun will last much longer. Analysts note that US banks have been able to keep deposit rates low while taking advantage of Federal Reserve rate increases in the form of higher loan yields.

As the Fed maintains its position and the gap between short-term and long-term rates narrows, they wonder if net interest income, which accounts for more than half of total revenue large banks, can continue to grow.

"In the last two years, 80% of revenue growth [for banks] was net interest income, of which 80% came from rate hikes and not from [loan] growth in volume, "said Richard Ramsden, a banking badyst at Goldman Sachs. "It's over now," the Fed stopped raising rates.

Mr Ramsden added that "the flattening of the curve also affected the reinvestment income of the securities portfolios", as banks, like other investors, may have to accept higher yields. low on new fixed income instruments as older ones mature.

The impact of rates on retail bank results is reflected in the expectations of large banks for net interest income in 2019. Last year, JPMorgan, BofA, Wells and JPMorgan's net interest income Citi increased by more than 10 billion, or about 5%. This year, their forecasts badume only 1.5% growth.

The range of interest income forecasts is broad: JPMorgan expects growth of 5%, about half of last year's rate. Wells predicted that the costs of deposits would likely increase, and actively sells risky high-yield loans and reinvests at lower rates. He expects net interest income to be between 2% and 5% this year.

Given the strong net interest income recorded in the first quarter, the forecasts of the four banks imply a rapid slowdown in growth at the end of the 2019 quarter.

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The economic prospects of banks also differ. JPMorgan is the most optimistic, and Chief Financial Officer Marianne Lake told badysts last week that "in March and starting in April, the economic environment seems more and more constructive. Customer sentiment has recovered and recent global data show encouraging momentum. "

In contrast, BofA chief financial officer Paul Donofrio said on Tuesday that consumer spending and the US economy had slowed "modestly." John Wellsberry, Chief Financial Officer of Wells, said the bank's bad debt reserves had increased due to "higher probability of less favorable economic conditions".

Mr. Peabody of Portales Partners believes that fee-based banking and market activities will be somewhat better for the rest of the year. But for loan profits to pick up, he said the yield curve – the difference between short-term and long-term rates – should increase. "The economy must return to 3% GDP growth, which would change the entire trajectory of the yield curve," he said.