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Seven takeaways on U.S. banks following Q1 earnings

April 27, 2020

Having concluded a wave of first-quarter earnings releases by major U.S. banks, we offer the following key takeaways

  1. No big surprises in performance declines: The major performance declines were largely expected given the first few weeks of the COVID-19 health crisis. Emergency actions by the Federal Reserve necessitated downward pressure on net interest margins. The rapid drawdown of many companies on credit facilities across the spectrum naturally led to a good deal of loan growth across all banks. And credit reserves—the cash banks must keep on hand to meet liquidity needs—experienced sharp increases across the board for the first time in many years.
  2. A silver lining, with a caveat: Volatility in all markets—equities, credit and money markets—has boosted trading revenue among big banks. On the downside, structured repo and other credit financing against non-CUSIP or less liquid assets have taken hits: Mortgage real estate investment trusts (REITs), some business development companies (BDCs) and non-investment-grade credit investors have all seen haircuts increase, prices skyrocket, and liquidity dwindle.
  3. This is not a 2008 redux: Unlike at the onset of the Great Recession more than a decade ago, the U.S. economy and banking system have entered this health crisis in historically good shape. Designated as essential businesses, banks are operating in full swing, providing individuals and companies with credit and allocating the stimulus money that the government has approved to keep the economy from crashing in the wake of shelter-in-place orders. And although COVID-19 continues to exact a heavy human and financial toll, banks are leading the way as part of the solution in an effort to alleviate the damage to companies, individuals, and the national economy.
  4. The need to confront resource-intensive stimulus programs: Banks are executing the U.S. Treasury and Fed programs for payroll protection and small businesses. Yet the swiftness at which these programs were launched, the speed at which banks must respond, and the volume of loan applications are proving burdensome. Banks are already scrambling to get the approved stimulus money to those who need it, and we expect them to reallocate resources to meet the demand for loans.
  5. The impact of lower spending and mortgages: We expect consumer and discretionary spending, which have taken a large hit, to affect non-bank lenders the most. Credit card consolidators and unsecured consumer-lending businesses will sustain more compromised assets and deferred payments. We also anticipate a decline in the mortgage business due to the slide in home sales and showings, notwithstanding a boost in refinancing applications. The negative state of the mortgage market will likely affect both the residential and commercial sectors, with forbearance and the failure of many to pay rent in April. The extent of the damage wrought by lower spending and mortgage-market weakness will depend on how long the health crisis will last, and on the magnitude of unemployment.
  6. The dollar-funding challenge of non-U.S. banks: We anticipate that U.S. dollar funding will continue to be a challenge for non-U.S. banks—especially given the sizable drawdowns on wholesale revolving credit lines—despite the stimulus and liquidity in the marketplace.
  7. The banking industry’s resilience: Banks are enacting their business continuity plans and finding that they can function with a good deal of employees working from home. With most U.S. financial centers shut, this fact is quite astounding: It demonstrates the resilience and adaptability of the banking system.

Mark Doctoroff, Global Co-Head of the Financial Institutions Group

Mr. Doctoroff is responsible for leading the firm’s wholesale business covering banks, securities firms, insurance companies, asset managers and funds, exchanges and clearinghouses, consumer-finance companies, and other non-bank financial institutions.