Aafter the hurricane A period of calm has passed and it is okay to feel euphoric. Survival is no longer threatened. Then, once the relief starts to fade, it’s time to assess the damage. What damage was done? How difficult will recovery be? The sequence will be familiar to anyone who has been following Bank of America this year. Panic and fear gripped the financial system in the days following the sudden collapse of Silicon Valley Bank, once the 16th largest bank in the United States, along with two others. Now, though, the storm appears to have passed. Of course, no lenders have been threatened since. The cue breathed a sigh of relief.
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What about the wreckage? It’s hard to discern the extent of that in hindsight. But US-listed banks must disclose their balance sheets and earnings on a quarterly basis, providing 30,000 feet of confusion. In the earnings season that began on April 14, Citigroup, JPMorgan Chase, police Banks and Wells Fargo report their first-quarter results, which will continue to be closely watched until April 24. By then, First Republic, a San Francisco-based bank that nearly collapsed in March, will delay disclosing its results and push back its normal timetable because of developments.
The panorama visible so far suggests that the damage has not hit every part of the banking industry evenly. The easiest way to see this is to examine three metrics — deposit base, interest income, and profits — for three banks of different sizes. The largest by assets is JP Morgan Chase with $3.7 trillion in assets; one of the largest regional banks, policewith $560 billion in assets, is a close second; Western Alliance Bancorp, an Arizona-based bank with just $70 billion in assets, completes the trio.
On every metric, JPMorgan has outperformed. Deposits have “flocked” as institutions and individuals flee from the rest of the industry as they move to larger, seemingly safer banks. As a result, the bank’s deposit base grows by 2% from the end of 2022. While JPMorgan Chief Financial Officer Jeremy Barnum warned he wouldn’t assume the deposits would persist because “by definition, [they] A bit fickle”, nonetheless the bank expects to now earn more interest income (the difference between what the bank collects on loans and what it pays to finance the financing). Late last year, JPMorgan saw its 2023 Interest income will be $74 billion. The bank now thinks its revenue will be around $81 billion because it has to pay less to keep deposits across the board. All of this helped the company boost profit to $12.6 billion, up from $1.2 billion last year. Up 15% in the first quarter and 50% over the previous year, JPMorgan looks as structurally sound as it did before the storm—maybe even sounder.
things are not comfortable police, our medium-sized bank. The good news is that the company’s deposit base has remained stable — averaging $435 billion in the final quarter of 2022 and $437 billion by the end of the first quarter of 2023. The bad news is that the company pays a lot more for those deposits. end of last year, police Customers place approximately 31% of their deposits in non-interest bearing accounts, and police Pay about 1.07% interest on deposits that earn interest. Now customers only hold 28% interest-free account deposits, police The rest of the quarter pays an average of 1.66%.Although increased interest police The bank’s net interest income fell to $3.6 billion from $3.7 billion, even as the pain of repaying loans has been numbed. The agency is clearly cautious — its loan book grew just 1% in the first quarter — and that caution means it also has less money set aside for loan losses than it did in the fourth quarter of last year. The overall result was a slight uptick in profits in the first quarter.
Next, consider Western Alliance, the weakest of the three banks. Here the damage is most apparent. Western Alliance lost about 11% of deposits in the first quarter of this year, although the bank’s management noted that deposits bottomed out on March 20 and have been climbing since then. As deposits are a low-cost source of funding, this pushes up the bank’s interest expense by almost 50%, from $250 million in the fourth quarter of 2022 to $360 million in the first quarter of 2023. Rising interest rates again sapped impact loans, which rose 10% in the quarter. As a result, the agency’s net interest income fell only 5% compared to the previous quarter. However, the most obvious evidence of the damage is its profit figures. As Western Alliance shrank, it sold parts of its balance sheet, including loans and securities. This resulted in a loss of $110 million in the first quarter. Profit fell to $142 million, halving from the previous quarter. The company is now planning to accumulate capital.
These indicators do not paint a picture of an institution on the brink of collapse. The clearest evidence of the bank’s imminent danger is that it has lost so much money — deposits — that it needs to sell large amounts of assets, even at huge direct losses. Another sign of doom is if a bank’s funding costs climb so much that its net interest income is wiped out, signaling that it will struggle to be profitable and maintain its capital levels in the future. None of that was apparent at the Arizona-based bank.
sweaty little thing
For now, investors appear to be reassured by the facts presented by Western Alliance. Shares of the financial institution rose 24% on April 19 (although they are still down a third so far this year). Its net interest income fell in the first quarter, but remains well above where it will be in 2021 when rates are at zero. Now that the bank has shrunk its balance sheet and started building capital, it may even end up doing better than it did in the low-rate era.
Still, other banks that have not yet reported, including First Republic, may have been hurt more severely. It is also possible that the full extent of the damage is not shown. Most banks report quarterly averages of their net interest margins rather than quarter-end figures, which would obscure recent events. The rise in the cost of capital may be bigger than it appears. Living through a storm can be a terrifying experience; getting through it unscathed is a relief. Not all banks have passed. ■
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