To The Moon

Last Fri, 14 July 2023, 3 US top banks (international) reported their Q2 2023 earnings in the morning.

At first glance, they looked like credible results and the pre-market indicators turned “optimistic”.

In the end, US market had a “mixed” closing (see below).

• DJIA: +0.33 (+113.89 to 34,509.03). Best performing index!

• S&P 500: -0.10% (-4.62 to 4,505.42).

• Nasdaq: -0.18% (-24.87 to 14,113.70).

Honestly, I don’t think the banks are doing that “well” despite the quarterly earnings data released so far.

Firstly, corporate clients are not providing as much of a lift, which is hurting banks that rely on them heavily.

Corporates are dragging their feet, mainly due to: (see below)

• Continuous interest hike; inflating costs of doing business.

• Continuous geopolitical tension between US & China.

• Dampening optimism on buying / investing in other companies.

• Willingness to take on more debt.

The cautious approach is evident in $Citigroup(C)$’s Corporate & Investment banking unit, that has reduced its overall profit by -36%.

Investment banking is not faring much better.

Citigroup CEO, Jane Fraser summed it up succinctly “The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter. “

• Above is “Global Investment Banking” revenue between 2018 and first half of 2023.

• Deal making peaked in 2021, the boom year.

• It began to taper in 2022, kickstarting staff layoff and bonuses reductions across Wall Street.

• Worldwide investment banking revenues for the second quarter fell -52% from a year ago, according to Dealogic.

• This explains why banks with big Investment banking & Trading units have cut roughly 12,000 jobs since the end of 2022.

• Downsizing is still happening, as recent as May 2023.

• At banks like Citibank, Morgan Stanley, Goldman Sachs etc.

The Week Ahead, How I See It:

(1) The Q2 quarterly earnings momentum is gathering pace as more Mega Cap companies gear up to release their results.

(2) US market performance (this week), would be influenced by (a) banks, (b) semiconductor and (c) tesla:

• Tue - 18 July: Bank of America (am).

• Tue - 18 July: Morgan Stanley (am).

• Wed - 19 July: Tesla (pm).

• Wed - 19 July: Goldman Sachs (am).

• Wed - 19 July: ASML N.V. Holding (am).

• Wed - 19 July: Netflix (pm).

• Thu - 20 July: TSM (am).

• Thu - 20 July: Johnson & Johnson (am).

(3) Given each company’s associated weight in the S&P 500 index, it will influence the index’s performance no doubt.

(4) Foresee corrections to Bank stocks this week.

This has already happened to 2 of 3 banks last Friday, (see below).

JP Morgan - 14 July performance

Wells Fargo - 14 July performance

Citibank - 14 July performance

Analysts have weigh-in on the following banks’ quarterly earnings:

• $Morgan Stanley(MS)$. Expected decline in its core businesses, with (a) -4% decline in Investment banking revenue and (b) -19% decline in Trading revenue.

• $Goldman Sachs(GS)$. Expected to report (a) a -32% decline in Investment banking revenue YoY and (b) -17% decline in Trading revenue.

(5) After the March 2023 banking debacle, Banks are now facing regulatory headwinds as the Fed wants them to hold even more capital to buffer against potential crisis.

When implemented, it means banks would have (i) less capital for lending and (ii) to return for capital, resulting in a potential overhang for the sector.

When banks find their lending ability constrained, customers will have to go to alternative sources of financing.

Will bank stocks’ consolidation presents a buying opportunity?

• Do you think Bank stocks will fall this week?

• Do you think US market will fall this week?

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