Earnings bonanza for US banks

Earnings season may have kicked off last week, but all eyes have been focused on today’s US bank earnings. JP Morgan, Bank of America, Citi, Goldman Sachs and Wells Fargo all reported results today, and they all beat estimates. Earnings were 45% stronger than expectations for Goldman Sachs, and JP Morgan beat EPS estimates by nearly 10%.

Virtually all areas of banking revenues were strong last quarter, including trading, M&A fees, lending and IPO activity.  Global investment banking revenue hit $61.4bn in the first half of this year, which is a 24% increase from a year ago. Life is good at the US’s largest banks, and they are benefitting from a surge in activity linked to the AI trade. Google’s bond sale, the Cerebras IPO and Space X’s IPO, which raised $86bn for SpaceX and netted investment banks a cool $500mn in fee revenue, all contributed to a bumper quarter for Q2.  

Fees linked to deal making were at their highest level since 2021, and trading desks capitalized on the volatility triggered by the war in the Middle East. Last quarter saw mega stock market returns, particularly for chip stocks and US indices, which had their best quarterly performance in 5 years. This boosted trading revenue at US banks, and Bank of America saw record trading revenue last quarter. Goldman Sachs was the leader in M&A fee revenue last quarter and Citi reported its highest quarterly revenue in a decade.

Earnings strength was broad-based, and the banks easily beat high expectations. Looking ahead, there is still a strong pipeline of activity for the banks, and the environment remains supportive due to strong business activity and robust demand for capital, for example, demand for loans is expected to grow by 10% this year.

Banks are benefitting from the AI super-cycle, which is boosting equity issuance, bond sales and, of course, IPOs. If Anthropic and OpenAI list in the coming months, then more bumper revenues are to be expected for the US’s largest banks.

In the aftermath of today’s earnings frenzy, bank shares have been mixed. JP Morgan is higher by 1% today, while Goldman Sachs is one of the top performing stocks on the US market, and is higher by 7% on Wednesday, as it remains a king of the investment banking world. However, Citi is not faring as well, and its share price is down by 4%. The reason for its underperformance is linked to its higher credit losses and its lower coverage ratio. This is leading to questions about the credit quality on Citi’s balance sheet, which is hurting investor sentiment towards the stock.

The banks may have posted monster earnings reports today, but most of them still sounded cautious about the outlook. Areas of concern included: market exuberance, especially around the AI trade, high valuations, the conflict in the Middle East which could erode deal making activity in the longer term, sticky inflation and fiscal deficits.

These are problems for another day, and the KBW banking index is higher by nearly 1% on Tuesday. It is higher by 15% YTD, which suggests that diversification away from the pure AI trade can still boost your portfolio.

Strong bank earnings combined with a Trump TACO on charging a 20% levy for cargo ships to use the Strait of Hormuz is positive for risk sentiment and could lead to a solid rally in US assets in the coming days.

Chart 1: KBW banking index

Source: Trading View and XTB