This Week in Earnings – Q1'23

Yesterday, we published our 32nd issue of our Inside The Buy-Side^® Industrial Sentiment Survey^®.

Fundamentally, U.S. Banks largely produced solid results, posting record profits and revenues. By charging higher rates on loans without substantially increasing the rates paid to depositors, banks were able to support their headline figures.

When digging a layer deeper, however, the true narrative of the health of the economy reveals itself.

Goldman Sachs and Morgan Stanley both reported lower trading and banking revenue, with executive commentary suggesting near-term uncertainty is weighing on corporate confidence to be active in the market. Still, many bank heads expect underwriting activity to pick up as the year progresses.

Liquidity emerged as the focal point of prepared remarks and Q&A. Universally, executives assuaged concerns in upfront remarks by pointing to shored-up liquidity ratios and healthy balance sheets, particularly in the context of anticipated regulatory scrutiny from emerging Basel IV liquidity standards.

Moreover, while mega-cap banks have certainly benefited from a temporary boost in depositors seeking safe haven in larger institutions as a result of the regional bank fiasco, executives question the “stickiness” of these individuals. In fact, deposits across the board experienced a net outflow YoY, as individuals pursue higher-rate alternatives.

At the consumer level, overall spending is described as “healthy”, but some reported signs of weakening as individuals cut deeper into savings and held higher credit balances amid persistent inflation. To that end, the majority forecast further rate hikes above 5.0% before cuts commence in 2024. Most executives continue to signal a mild recession sometime in the coming quarters.

Key Themes

• Macro: Executives Express Near-term Caution; Deal Flow Reflects Broader Uncertainty, but Many Suggest Activity Should Pick Up as the Year Progresses
• Interest Rates: Further Rate Hikes Expected, With Many Forecasting Peaks Above 5.0% Before Cuts in 2024
• Liquidity: Banks Trumpet System Stability in Wake of SVB Crisis While Bracing for Heightened Regulatory Scrutiny, Namely Basel IV Liquidity Requirements
• Deposits: When the Chips Fell, Banks Enjoyed Flight to Quality Benefits from Regional Bank Instability But Deposits Are Being Pressured by Higher-Rate Alternatives
• Consumer Health: Executives Report a Resilient but Weakening Consumer, Noting Lower-income Cohorts have Drawn Down Savings Below Historical Averages with Increasing Debt Balances; Reserve Levels Reflect Further Deterioration
• Outlook: Forecasts Call For a “Mild” Recession in 2023