Q1 26 US Bank Earnings Review

A Solid First Quarter

First quarter bank earnings season has now been and gone on Wall Street, with the six biggest institutions having now released figures for the first three months of the year.

For the most part, the first quarter was a solid one, with top- and bottom-line beats being seen across the board, while revenues and profits rose substantially YoY across the board.

Still, it wasn’t all good news, and a few blemishes are notable. Goldman (GS), for instance, endured a tough first quarter in terms of FICC trading revenue, with desks seemingly failing to capitalise on the substantial market volatility seen during the quarter, with similar disappointment compared to estimates also being seen at Bank of America (BAC). Elsewhere, Morgan Stanley (MS) took a very marginally higher than expected provision for credit losses, while the shine was taken off an otherwise solid Wells Fargo (WFC) report amid misses in both net interest income (NII) and net interest margin (NIM), which drove the stock to its biggest one-day decline in a year.

Looking Forwards

Participants, of course, were not focused solely on performance seen in Q1, but also any macroeconomic commentary on offer, and guidance for the quarters ahead.

On the macro side of things, commentary was relatively optimistic, particularly from the retail-focused banks. Wells indicated that consumer spending remains “resilient”, rising every week on an annual basis, while BofA flagged their belief that the US economy remains ‘resilient’. On a broader level, JPMorgan (JPM) CEO Jamie Dimon flagged an ‘increasingly complex set of risks’ facing the sector, and the economy at large, referring of course to ongoing geopolitical uncertainty in the Middle East, though also flagged the ‘resilience’ of both consumers, and corporations, across the US.

All told, the banks, at this stage, appear to have little concern regarding potential significant negative impacts, either on growth, or on inflation, stemming from the surge in energy prices, and associated geopolitical uncertainty.

That said, it was not entirely ‘good news’ in terms of the outlook. JPMorgan, for instance, marginally downgraded their FY NII guidance, to $103bln, from a prior $104.5bln, though expenses were seen unchanged, with the risk of profitability in the sector more broadly being crimped likely an area that participants will pay particular attention to in the coming months.

Other Areas Of Interest

Beyond guidance, private credit is another area that attracted significant attention throughout reporting season, in light of numerous funds having limited, or ‘gated’ redemptions in recent weeks, fuelling concern over risks that may be bubbling away in the $1.8tln market.

Perhaps unsurprisingly, all the banks who released information as to their exposure to private credit indicated that they have considerable collateral and protections in place in the event of a significant deterioration in credit quality. In terms of exposures, though, JPMorgan appear to have the largest such portfolio, having put their exposure at $50bln, all the way down to BofA whose portfolio is less than half that size. In the grand scheme of things, however, banks appear well-positioned to weather any storm in the sector, while I retain my overall view that the sector on the whole is too small to pose major, systemic risks.

Besides that, the Trump Admin’s continued deregulation agenda and lower capital requirements has continued to free-up cash, which will likely not only be used to boost lending, but also to increase shareholder returns, hence news on buybacks is something to now watch closely.

Lastly, given the uncertain macroeconomic outlook, and ongoing conflict in the Middle East, there remain concerns as to whether the pace of dealmaking activity may slow in the short-term. That said, for the most part, M&A and IPO pipelines both remain solid, with any near-term dip in activity more likely to represent a ‘pause’ as opposed to corporates entirely scrapping their capital market plans.

Market Reaction

Despite a largely strong set of results, that paints a positive picture of the banking sector and the US economy at large, the market reaction to the Q1 bank reports has been underwhelming. The KBW Bank Index (BKX) trades around 1% higher on the week, since GS kicked-off reporting season which, while fine in isolation, compares poorly to the 2.2% gain seen in the S&P 500 over the same period.

This rather muted reaction potentially speaks to lingering concern as to the economic fallout from conflict in the Middle East, especially in terms of consumer health, as well as lingering jitters over the private credit space. That said, as light increasingly appears at the end of the geopolitical tunnel amid ongoing US-Iran talks, and with the foundations of the banking sector remaining robust, banks should continue to perform relatively well in the coming months.