First Quarter Bank Earnings Paint a Rosier Picture Than GDP Estimates

In at least one previous market note, we wrote that first quarter U.S. GDP has been weak in recent years, and 2015 looks to be just as uninspiring: 0% growth year-over-year by the Atlanta Fed’s estimate. Bank earnings released last week provide something of a respite from the dour outlook. Some of America’s biggest banks, including Wells Fargo (WFC), J.P. Morgan (JPM) and U.S. Bank (USB), reported revenues rising mildly, in the range of 2% to 4%, but rising nonetheless, and topping analyst forecasts. Bank business mixes favoring more volatile revenue streams tied to the capital markets drove performance last quarter, and that is a good indicator of broader economic progress. JPM, a bank with a larger proportion of revenue coming from trading and investment banking advisory, reported a 30% increase quarter-over-quarter in business in that division. By comparison, WFC reported similar success in their equivalent group, but since capital markets is a smaller portion of their overall business, they enjoyed slightly lower growth than JPM. Focusing more intently on traditional banking, USB reported the least growth. All three institutions remarked on a declining net interest margin, which is the difference between the rates at which banks borrow and lend, which has currently fallen to around 3% at the largest banks, and is continuing to drop. Since USB’s business mix favors borrowing and lending versus fee-driven revenue (like mergers and acquisitions advisory), it underperformed its more markets-driven peers. Aside from modest growth, the three banks all reported continued improvement in their lending portfolios, another indication of positive economic conditions. As an example, JPM reported non-performing loans as a proportion of total loans dropped to 0.9% from 1.1% (an already low figure) the same quarter a year earlier. Importantly, total loans grew at JPM, suggesting broader consumer credit quality is continuing to improve. Banks have access to one of the least expensive forms of financing, deposits, which also continued to grow quarter-over-quarter all around. On the quarterly earnings call last week, WFC’s CFO remarked, “This is some of the strongest deposit growth I’ve seen in my 30 some years in the company.” All things considered, last week’s bank results paint a rosier picture of the economy than initial GDP estimates, and banks themselves remain credit bastions. We will not have the official GDP figure until later this month, and if bank estimates are any indicator, we may expect a reading slightly stronger than the Atlanta Fed’s prediction.

Sources: Atlanta Fed, GS, WSJ, Bloomberg, SNWAM Research