US Banks 3Q23 Preview: The Performance of Major Banks and Regional Banks May Further Diverge

This Friday, JP Morgan, Citigroup, and Wells Fargo will release their financial reports, kicking off the third quarterly reports of the banking industry.

In the previous 2Q reports, major banks announced better results than regional banks, with net interest income exceeding expectations, but the market response remained mediocre. In the third quarter, some bank indicators improved slightly, but higher interest rates also brought more challenges to banks.

Overall deposit inflows in the industry unexpectedly resumed in the third quarter. Wage growth finally exceeded inflation in the third quarter, causing residents' savings to return to growth, although high-income groups received more savings. Further outflows from small and medium-sized banks need to be observed.

Loans have been flat/down slightly since 4Q22 given weaker demand and tighter underwriting standards at banks driven by economic uncertainty.

According to H8 data (as of September 13), period-end loans are flat/down very slightly (just 0.2% unannualized) vs. 6/30. Increases in credit card (+1.0% vs. 6/30) and residential real estate (+1.5% vs. 6/30) are being offset by declines in C&I (-1.4%), other consumer (-2.1%) and commercial real estate (-1.0%). On an average basis, total loans are also flat/down very slightly (down just 0.2%) q/q.

Deutsche Bank's research report shows that among major banks, only JPM and BAC's loans are expected to grow compared to the last quarter.

Loan interest rates continued to rise in the third quarter. Credit card interest rates exceeded 21%; car loan interest rates were above 7.80%, and prime loan rates reached 8.50%.

Excessively high interest rates could increase the burden on residents, which in turn may lead to more non-performing assets, which will be mentioned later.

Deutsche Bank expects 3Q23 net interest margin to decline 8bps QoQ and to decline 3bps YoY given consistently high deposit repricing pressure, and net interest income is likely to decline 2% QoQ due to slowing loan growth.

There are growing expectations for rising loan losses. Deutsche Bank expected 3Q charge-offs to increase 17% vs. 2Q levels. Deterioration appeared driven by office CRE and credit card. Barclays' latest report predicted non-performing assets and delinquency rate to continue rising in 3Q23.

Banks may accumulate capital in the third quarter to meet adequacy requirements and cope with a potential economic downturn. The ACL (Allowance for Credit Losses) / Loan ratio increased 4bps at the median bank in the 2ndquarter. Barclays expected a similar increase in 3Q23.

The fact that banking operations are becoming increasingly prudent will affect profitability. Besides, unrealized losses increased in the 3rdquarter as the 10-year treasury yield jumped 73bps to 4.57%, approximating its highest level in 16 years.

The good news is roughly half of major large banks have announced dividend increases for 3Q23. Even if some investors still believe that this is not the best time to buy bank stocks, the third quarter is still a good window to observe whether large banks and small banks will continue to diverge.