Banks have reduced their loan-loss reserves despite rising concerns about loan quality and potential economic shocks, leading to investor skepticism. While some banks like JPMorgan increased reserves due to specific bad loans, overall industry sentiment remains cautious amid fears of rising defaults, especially in regional banks and private credit markets. Despite current stability, uncertainties about future economic conditions and the health of private credit markets keep investor caution high.
Major US banks reported strong third-quarter earnings, highlighting robust credit portfolios and a booming investment banking sector, despite recent auto company bankruptcies raising concerns about potential hidden risks in the economy.
American Express reported better-than-expected earnings driven by strong demand for its revamped Platinum card, which doubled its US account acquisitions and included new perks and a higher fee. The company raised its full-year revenue and earnings guidance, with increased customer engagement and improved credit quality, despite higher expenses and competitive pressures.
Despite signs of a cooling job market, US consumers remain financially healthy with strong spending and credit performance, according to top banking executives, even as economic data suggests job growth is slowing.
Moody's Investors Service has downgraded the outlook for eight Chinese banks, including the big four lenders, to negative from stable, citing the potential decline in the credit quality of China's central government. Moody's also lowered Hong Kong's outlook from stable to negative due to the close political, institutional, economic, and financial ties between Hong Kong and mainland China. The downgrades reflect concerns over China's rising debt levels and their impact on GDP growth. Moody's also slashed its outlook for 22 Chinese local government financing vehicles to negative.
Credit card data from last month reveals a decline in credit quality, with the average delinquency rate slightly below pre-pandemic levels and the average charge-off rate surpassing 2019 levels. The total credit card loans at eight lenders have increased by 12% compared to last year, but some lenders, including JPMorgan Chase, Citigroup, Bank of America, and Bread, have seen balances decrease. Analysts suggest that higher net charge-offs may be linked to student loan repayment resumptions and ongoing inflationary pressures. The rise in credit card delinquency rates is widespread, particularly among millennials and those with auto or student loans. As consumers face rising prices and reduced income, they are increasingly relying on credit cards to manage their finances.
The US banking industry is facing significant downside risks from inflation and high interest rates, which could weaken profitability and credit quality, according to FDIC Chair Martin Gruenberg. The FDIC's report on the second quarter showed a decline in deposits for the fifth consecutive quarter, putting pressure on banks to raise funding costs. Concerns about a weakening market for commercial real estate also pose challenges to the industry. While there were signs of increased resiliency, such as a decrease in the number of banks on the FDIC's "problem" list, the direction of bank profitability, measured by the net interest margin, is a cause for concern.
Affirm Holdings stock is experiencing a surge despite mixed opinions from Wall Street analysts on whether it is a good investment, as the pay later company dismisses worries about consumer strains in its latest update.
Shares of PacWest Bancorp led declines in U.S. regional lenders at market open on Tuesday as investors feared the ongoing banking crisis could deepen. PacWest and Western Alliance, which have been at the heart of the sell-off in regional banks, saw the steepest decline in deposits in the first quarter after First Republic. U.S. firms of all sizes were showing less demand for credit than three months ago, according to a Federal Reserve survey, among the first measures of sentiment across the sector since the recent run of bank failures.
Improved credit quality, expectations for a mild recession or soft economic landing, and current valuation discounts make it a good time to invest in high-yield bonds, also known as junk bonds, which are riskier but pay higher interest rates. Investors who focus on this space now may see excellent performance over the next few years, especially if interest rates decline.
