QQQ - U.S. Banking Sector Reached All-Time High In Profits In The First Quarter

2023-05-11 17:51:26 ET

Summary

• There is trouble in the banking system, yet commercial banks are producing massive profits.
• Among other things, the banking system is loaded with cash, particularly the largest 25 domestically chartered banks in the United States, with JPMorgan Chase & Co. leading the field.
• Looking further at the banking data, the largest 25 domestically chartered banks have $1.5 trillion in cash assets, roughly half of the cash assets in the banking system.
• Whereas these banks took advantage of this as the Fed created an "asset bubble" during the spread of the Covid-19 pandemic, it appears as if some banks did not protect themselves as the "asset bubble" declined.
• It looks like some relatively large banks, like Silicon Valley Bank and Republic Bank, took advantage of the upside of the bubble, they failed to protect themselves on the downside and we may get more.

Believe it or not, the United States banking sector reached an all-time high in profits in the first quarter of 2023.

The figure came in at around $80 billion, up 33 percent from one year ago.

Stephen Gandel reported these results in the Financial Times . The data are from BankRegData, a data provider that collates quarterly reports made by lenders to the Federal Deposit Insurance Corporation.

"JPMorgan Chase, the nation's largest bank by assets, had the highest profit of any lender, earning $11.7 billion in the quarter...up from $6.4 billion in the same three months a year earlier."

The banks took advantage of the following good news: first, the banks benefitted from rising interest rates; second, the banks benefitted from low rates of loan defaults; and third, the expanding labor market seemed to support low loan losses.

There is a fourth reason that is not so apparent from the figures generated, and that is the rise in cash assets and very short-term liquid assets that have accrued to the banking system due to the large liquidity injections made by the Federal Reserve over the last few years.

This rise in cash assets is associated with the "asset bubble" created by the Federal Reserve in fighting the effects of the spread of the Covid-19 pandemic.

Cash Assets

Look at what happened to the cash holdings of domestically charted commercial banks in the United States. These figures are from the H.8 Federal Reserve statistical release.

On April 26, 2023, the large, domestically chartered commercial banks in the United States held $13.1 trillion in total assets.

Note, there are only 25 large, domestically chartered commercial banks in the United States.

Small, domestically chartered commercial banks in the United States held just $6.8 trillion in total assets.

On April 26, 2023, the large, domestically chartered commercial banks in the United States held $1.5 trillion in cash assets. This was 11.5 percent of the total assets of these 25 banks.

The smaller, domestically chartered banks held $0.5 trillion in cash assets, just 7.5 percent of their total assets.

Note: foreign chartered banks hold cash assets totaling $1.3 trillion, and only have $3.0 trillion in total assets in the United States.

Thus, the commercial banks in the United States are holding $3.2 trillion in cash assets.

In terms of the domestically chartered commercial banks, if we go back before the spread of the Covid-19 pandemic, for example, let's go back to December 28, 2018.

On December 28, 2018, the large, domestically chartered commercial banks held roughly $900.0 billion in cash assets. Assets totaled $9.57 trillion so that the ratio of cash assets to total assets at that time was 9.4 percent.

So, since the end of 2018, the large, domestically chartered commercial banks adjusted their balance sheet so that cash assets took up a full two percentage points of total assets.

The total increase was from $0.9 trillion to $1.5 trillion.

This is massive!

The smaller, domestically chartered commercial banks only saw cash assets rise by a little less than $200.0 billion. The ratio of cash assets to total assets rose from 6.1 percent to 7.5 percent.

The largest 25 commercial banks in the United States now hold cash assets that amount to almost one-quarter of the total assets of the small, domestically chartered banks in the United States.

My argument is that the profits of the largest 25 domestically chartered banks in the U.S. were heavily augmented by all the liquid assets that the Federal Reserve pumped into the banking system. Part of the argument made here is that the largest commercial banks were the greatest beneficiaries of this "asset bubble" while the smaller banks participated in a much lesser degree.

Thus, Jamie Dimon and JPMorgan Chase & Co. (JPM) were able to perform so well , given the not-so-healthy economy.

Cash assets may be called cash assets in the balance sheet format we work with, but, let it be known that these "cash assets" are not just sitting idly by, earning nothing.

The Banking System Picture

Conclusion: the largest 25 commercial banks in the country are doing pretty well and are heavily cushioned with cash.

The rest of the banking system, the smaller, domestically chartered commercial banks?

Well, this is where the banking system is having problems.

This is where Silicon Valley Bank (SIVBQ), Signal Bank, and First Republic Bank (FRCB) come from.

Note, that three of the commercial banks that recently failed are a part of the four largest bank failures in U.S. banking history.

These three commercial banks did not manage their balance sheet well.

These banks were less liquid because, in managing their balance sheets, they were not sufficiently liquid to handle the "bank runs" that hit their businesses.

I know that the situation was different from in the past. The "bank runs" were connected with the "new" digital frame of the banking system, but, nonetheless, the end result was connected with the way these banks tied up their liquid assets in order to try and earn a greater return.

They got caught.

But, what about the smaller, domestically chartered commercial banks?

The largest commercial banks in the banking system seemed to have seen the "asset bubble" created by the Federal Reserve and prepared for the other side of the bubble, the downside that we are going through now.

The smaller commercial banks appear to have taken advantage of the upside of the "asset bubble" but did not prepare themselves for the downside of the "bubble."

This of course is a major problem with "bubbles."

What goes up, must come down.

But this should alert us to the fact that there will be more troubles in the banking system in the near future.

So, we need to be on the watch.

The Federal Reserve needs to be on the watch.

It is highly likely that there will be more bank failures in the near future. And, the problems will probably trace what we have already seen over the past month and one-half.

Probably we will not get a whole lot of the smallest banks failing. We are going to see this sector decline anyway given the changing technology.

The disruptions will probably come in the center section of the banking system, the larger regional banks that have been sophisticated enough to try and take advantage of the upside of the Fed's asset bubble, but have not moved to protect themselves on the downside.

Not a very pretty picture.

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