QQQ - More Earnings From Banking: Morgan Stanley And Bank of America

2023-07-18 20:10:20 ET

Summary

• The largest banks so far reporting have all benefited from the effort by the Federal Reserve to raise interest rates, and loan rates have risen much faster than deposit rates.
• As a result, in some pretty tough times, the largest banks are reporting improvements in earnings performance, and this is true of Bank of America Corporation and Morgan Stanley.
• The leaders of these large banks are all making it known that their results have been helped by rising rates, but caution that this environment will go away.
• Other areas of banking have not done too well, as the investment banking and the trading businesses of most of the largest banks have declined.
• The performance of the largest banks is calling attention to problems that might be faced by regional banks and even smaller banks, and attention needs to be given to see how they are doing.

The commercial banking industry continues to post adequate returns for this time of turmoil.

The Bank of America Corporation (BAC) posted a Return on Equity in the second quarter of 2023 of 11.2 percent, up from 9.9 percent one year ago.

Its Return on Tangible Common Equity came in at 15. 5 percent, up from 14.1 percent one year ago.

Morgan Stanley (MS) posted an 8.9 percent Return on Equity in the second quarter of 2023 , down from 10.1 percent one year ago.

In terms of their capital position, Bank of America recorded a CET1 of 11.6 percent in the second quarter, up from 10.5 percent one year earlier. Morgan Stanley had a CET1 of 15.5 percent in the second quarter up from 15.2 percent one year ago.

Higher interest rates are the major part of the story in terms of these performance outcomes.

The Federal Reserve has been raising its policy rate of interest over the past 18 months or so, and the interest rates on loans have risen relative to the rates the banks charge on deposits.

Hence, net interest margins have gone up to quite high levels.

All the large commercial banks that have reported so far have warned that this "good" result will probably not last too far into the future. But, the banks are taking advantage of the situation while it lasts.

Whereas all the other big banks, including Morgan Stanley, saw their revenues from investment banking and from trading activities drop, Bank of America reported a very good quarter in these activities.

Bank of America reported that revenues from bank commodities and currency trading were up by 18 percent in the quarter. BofA's chief financial officer Alastair Borthwick reported to the Financial Times that "the bank's trading business had its best first half of the year in a decade."

Overall, the adjusted revenue from sales and trading, including equities, climbed 10 percent from a year ago.

And, fees from investment banking were also up 7 percent.

The other four large banks have all reported that these two areas, investment banking, and trading, declined in the quarter from the scarcity of deals and weaker trading volumes.

Morgan Stanley reported that revenues from sales and trading dropped 22 percent in the quarter. In terms of fees from investment banking, they were roughly the same as one year ago.

"The biggest drag on BOA continued to be a decision made three years ago to pump $625 billion in pandemic-era deposit inflows into the debt markets at a time when bonds traded at historically high prices and low yields."

The bank reported .

"Unrealized losses in the bond portfolio...rose to $110 billion in the second three months of the year...."

"BOA has by far the highest level of unrealized losses of any bank in the nation...."

Morgan Stanley benefitted from its move into wealth management as the reported revenues from this area reached $6.7 billion in the second quarter, up 16 percent from a year ago. The business took in $89.5 billion in new net assets, and this far exceeded expectations.

James Gorman, Morgan Stanley's CEO, stated that the bank's wealth management division had become "a pretty much unstoppable force."

Mr. Gorman continued: the bank would soon reach $10 trillion in assets under management and believed that this number would, in the not-too-far future, hit $20 trillion.

To justify this number Mr. Gorman added "That seems like a long way out. But I started this job 14 years ago and we had much, much fewer than $6.3 trillion we have today."

He added, "if you did 5 percent [compounding] over 14 years you end up at $20 trillion."

And, so the two large banks are looking ahead, and they are looking ahead positively.

The surprising thing is that all managements understand the good number they have reported and are cautioning investors that the investors must expect some movement back from the results turned in this quarter.

For one thing, I believe that these large banks have done as well as they have because of their size and position in the banking industry.

I think these large banks realize that they have really benefited from the massive amount of money the Federal Reserve has injected into the banking system over the past three or four years.

All these banks have an ample amount of cash on hand and readily marketable securities in their portfolio. They are about as liquid as you can get.

And, their capital positions are all quite good.

That is why they have produced the results they have.

If anything, this assessment puts the attention back on the smaller banks, the regional banks, and the fears that are now being extended to how their earnings performance will look.

Columnist Telis Demos calls special attention to the condition of these "smaller" banks today in the Wall Street Journal .

The concern is for situations like the one of Silicon Valley Bank, the regional bank that failed in early March of this year.

The concern is also with deposits.

Silicon Valley Bank lost a lot of deposits it did not expect to lose, and this loss of deposits forced it to sell low-interest bonds that it had purchased when market interest rates were quite low.

One of the things that is being reported all over these days is just how fast deposits are moving around the banking system. This "moving" is being reported by almost everyone and in about every report or analysis.

This poses a real danger, especially when so many banks have so many loans and bonds that are "underwater" now.

So, as the bank earnings season goes along, we will get more and more information about just how bad off the balance sheets of the "smaller" banks are… especially the regional banks.

This is something we all need to be concerned about.

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