It’s Still Harvest Season For The Brexit Premium
The earnings season for US banks kicked off yesterday, with JP Morgan, Citigroup, Goldman Sachs and Wells Fargo all reporting. The results were mixed, with JPM and Citi beating Earnings Per Share expectations, while GS missed after marking down various equity investments, such as Uber and We co., while fees from investment banking also fell.
However, though it is interesting to see how the banks are faring versus the analyst expectations, for us, it is the insight into the US economy and the strength or weakness of their customers, that we find most interesting in the banking results, and especially so when the US economic data is increasingly pointing to a slowdown. It was clear from the analysts calls that geopolitical tensions had certainly fed into the economy, with Citi referencing the “consistently uncertain environment” and its CFO, Mark Mason, saying that corporate clients were exhibiting a “cautious sentiment” and that the bank noticed clients taking a “pause” when considering capital expenditure, M&A activity and IPOs. These sentiments were echoed on the JPM call, when CEO, Jamie Dimon, noted that the trade war was “reducing CEO confidence”, which had a negative impact on CapEx, although JPM also emphasised the economy was on fairly solid footing, even if it was slowing.
What was more interesting to us was the demand side of the lending equation. It seemed fairly clear that the banks are very well capitalised and open for business and are not obviously pulling back on lending to their customers, however, it also seemed evident that customers do not have appetite for further borrowing and demand for loans is falling; with JPM average loans down 4% and home lending down by 12%. This is probably mostly due to the geopolitical uncertainty mentioned above, and it seems the pivot from the Federal Reserve and the subsequent rate cuts have not encouraged more borrowing. This lack of demand was also hinted at in the last Senior Loan Officer Survey, and it will be interesting to see the demand statistics when the survey is released next month.
However, despite demand being mixed, there were no concerns as regards the health of the all-important US consumer, with Dimon stating that the US consumer was doing fine, saying “The consumer balance sheet is in great shape". With consumers accounting for 70% of the US economy, they will be key to the US avoiding a recession in the near term.
All in all, while the news might be mixed for equity investors, it is not bad for fixed income investors; the economy is slowing but is still expanding, the consumer is in good shape and banks are willing to lend – this points to the economic cycle extending further, in the absence of a shock. What is different to other cycles is the lack of demand for borrowing and this means we might need to challenge conventional wisdom, as the excesses in the economy could be much more contained at the end of this cycle, than we’ve seen in the past.
It is early days in the earning season and there will be nervous days ahead for equity markets as the earnings season hots up, and of course we need to see what the other large US banks are seeing in the economy as well. However, there were no major warning lights yesterday, which will have economic commentators breathing a little easier, while the banks that have reported will also look forward to fairly easy “comps” to beat in Q4, after last year’s big selloff.