Banking Crisis and Inverted Bond Yield: A Pre-Earnings Report Analysis for US Banks
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Lede
The recent banking crisis, heavy borrowing from the Federal Reserve’s discount window, and the inversion of bond yields have significantly affected US banks, resulting in investors' anticipation of a possible recession.
Summary
- JPMorgan Chase & Co. will start the earnings reporting season on April 14 amid a significant banking crisis, sharp drop in bank stocks, and a possible recession signaled by the bond market.
- Banks experienced seismic changes due to a potential overhaul of the insured deposits system, a rush of deposits out of regional banks, and the Federal Reserve's Bank Term Funding Program to prevent further bank runs and failures.
- The bond market’s yield curves inverted to their widest levels in decades, indicating investors are piling into shorter-term debt as a haven for the predicted trouble ahead.
- During March, the interest yield on a two-year note rose to 5.015%, while the yield on 10-year Treasury notes fell to below 4% on the same day.
- Credit losses for banks may occur during a recession, which is a possibility since analysts have cut their earnings estimates for both big banks and regional banks.
- KBW Nasdaq Bank Index and SPDR S&P Regional Banking ETF have already lost a significant amount of value, prompting analysts to reduce their earnings estimates for banks across the board.
- KBW downgraded Goldman Sachs Group Inc. and Morgan Stanley because of their larger exposure to a slowdown in investment banking activity, among others.
- Analysts expect lower net interest income growth and margins, as well as higher expenses and lower buybacks for banks.
- First Republic Bank, JPMorgan Chase, Wells Fargo & Co., and Citigroup are among the US banks expected to report earnings in April 2023.
- Banks may shift towards a more defensive and conservative stance, causing pressure on net interest income, as they move their balance sheet holdings to more liquid average earnings assets with lower yields.
- The uncertain economic environment may also result in slower loan growth and a slew of downward revisions to guidance.