Monday Musings: April 19, 2021

Apr 19, 2021

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Public Trust Credit Team
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U.S. money center banks kick off first-quarter earnings with solid results

The four largest domestic banking groups, J.P. Morgan, Bank of America, Citigroup, and Wells Fargo, all reported Q1 2021 earnings last week with results largely surprising to the upside compared to street guidance; the results also highlighted consistent themes across the sector. Core revenues were generally flat to slightly down year-over-year as muted loan growth and repricing effects weighed negatively on net interest income and net interest margins. Alongside markets and trading-related results, investment banking continues to shine, significantly boosting fees for the period and helping to partially offset the negative revenue impact from low rates and subdued credit demand. Deposit growth continues to outpace loan growth, but growth in interest-earning assets has begun to pick up, owing to higher security balances as the sector works to deploy excess deposit liquidity. 
 
Bottom-line results were extremely strong on the back of reserve releases given the procyclicality of the Current Expected Credit Losses methodology; this accounting standard for estimating allowances for credit losses requires U.S. banks to make general and specific provisions for interest-earning assets based on loss assumptions over the life of the asset. Specific provisions are tied to individual exposures expected to become delinquent based on borrower-specific characteristics, while general provisions (which account for the vast majority of total allowances) are tied to expectations in the macro economy. Given the significant improvement in the economic outlook compared to a year ago, general provision reserve releases were substantial across the board in Q1 2021, leading to a material boost in profitability and return metrics. 
 
In general, credit conditions in North America remain favorable with customer delinquencies and net charge-offs continuing to decline. Macro model assumptions, however, are unlikely to improve dramatically in subsequent quarters, suggesting we will not see reserve releases of a similar magnitude moving forward. Capital levels remain extremely robust and sizable buffers above regulatory requirements are likely to give rise to higher shareholder returns via repurchases over the coming quarters.

Strong bounce back for China’s economy in the first quarter

Last week, China released its first-quarter GDP figures that showed an impressive 18.3% year-over-year growth, slightly below economic consensus but still quite strong. China’s economy bottomed out in the first quarter last year, so this reading will likely be the largest of the year before coming back down to Earth in Q2 and beyond. While China’s economic recovery was largely led by manufacturing and exporting due to lockdowns from flare-ups of COVID-19 cases in the major cities, China’s consumers are looking strong with March retail sales up 34% from a year earlier and vaccines continuing to roll out. That said, we always take China’s economic data with a grain of salt, but the strong Q1 data gives hints as to how good the Q2 data could be in other countries like the U.S. that bottomed out in Q2 of 2020.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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