Big U.S. banks are set to release their second-quarter financial results, and investors are preparing for increased borrowing activity in the bond market by these top lenders.
Major players such as JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. will report their earnings for the quarter on Friday. The focus will be on how higher interest rates have impacted bank assets and the overall health of the banking sector, following the collapse of Silicon Valley Bank in March.
Following these earnings announcements, Bank of America Corp., Morgan Stanley, and Goldman Sachs Group will release their results next week.
Analysts predict that the six largest banks will issue bonds worth between $28 billion and $32 billion after their earnings reports, based on data from JPMorgan analyzed by Bloomberg.
Tom Murphy, the head of investment-grade credit at Columbia Threadneedle, expects this level of issuance but also notes that proposed changes to bank capital requirements at both the U.S. and international levels could influence the amount of fresh debt being issued.
Optimism Surrounding Interest Rates
Last summer, only four of the six major U.S. banks borrowed from the bond market after reporting second-quarter earnings, according to Informa Global Markets. The total amount raised was $27.5 billion, with Goldman Sachs and Citigroup refraining from issuing bonds during that period.
In contrast, this year, the same six banks raised only $35.75 billion, a significant decrease from the $88 billion raised during the corresponding period last year.
There has also been a decline in overall issuance from the financial sector, accounting for approximately 30% of total issuance in 2023, down from over 40% last year, as estimated by Murphy.
The increase in borrowing costs is a contributing factor. As the Fed’s policy rate rose by approximately 500 basis points from the pandemic lows, interest rates for major companies also increased. However, issuers of debt tend to explore favorable opportunities in the capital markets to issue new bonds.
The Current State of the U.S. Economy
Recent developments in the U.S. economy have sparked optimism, with the stock market trading at levels only 7% below record highs. According to FactSet, the S&P 500 index (SPX) has witnessed a 17% increase this year, reaching approximately 4,489, and it recently came close to its peak of 4,800.
While short-term bond yields have risen in line with the Federal Reserve’s interest rate hikes, the benchmark 10-year Treasury yield (TMUBMUSD10Y) has slightly declined to around 3.78% as of Thursday, down from its recent high above 4%. As a result, borrowing costs for major corporations have decreased, returning to levels similar to those seen at the beginning of the year.
Stability for Big Banks
Unlike smaller lenders who have encountered difficulties due to depreciating low-coupon loans and securities resulting from the Fed’s rate hikes, big U.S. banks have managed to navigate these challenges relatively unscathed. According to JPMorgan’s midyear outlook, deposits at banks decreased by $1 trillion in June compared to their peak of $17 trillion in the first quarter of 2022. Regional and small banks accounted for a $5.2 trillion share of the total deposit base, which was approximately 4% lower than at the end of 2022. However, there are signs of stabilization within this group, particularly in the first quarter.
“It really hasn’t been detrimental to these six large lending institutions,” stated Murphy, a banking analyst. He further expressed confidence in the ability of big banks to withstand a potential recession and highlighted the favorable yields currently available, which rival those of the fall of 2009.
The yield on the ICE BofA US Corporate Index stands at 5.52%, compared to 5.47% on January 3.
Moreover, the issuance forecasts have received a boost from plans among many major banks to increase dividends following the Federal Reserve’s stress tests in late June. These tests indicated that these banks appeared capable of weathering a severe shock to the financial system and the overall economy.