US bank stocks are soaring, hitting their highest levels since the collapse of Silicon Valley Bank (SVB) in 2023. The recent strong quarterly earnings reports from JPMorgan Chase and Wells Fargo have bolstered investor confidence in the broader economy.
JPMorgan, the largest bank in the US, reported profits of $12.9 billion, surpassing analyst expectations of $12.1 billion, although this reflects a 2% decline compared to the same period last year. Notably, the bank set aside $3.1 billion to cover potential loan losses, a significant increase from the previous year’s third quarter, indicating preparation for possible rising defaults among borrowers.
Consumer Spending Remains Robust
Despite the rising provisions for loan losses, consumer spending remains strong in the third quarter. Both JPMorgan and Wells Fargo noted that American consumers continue to spend, even amid inflation pressures on lower-income households. JPMorgan's CFO, Jeremy Barnum, affirmed that “spending patterns remain solid,” echoing sentiments from Wells Fargo’s CFO, Michael Santomassimo.
The data supports this optimism: Wells Fargo reported a nearly 2% year-on-year increase in debit card purchases and a 10% jump in credit card sales. Similarly, JPMorgan experienced a 6% increase in both debit and credit card transactions. This positive spending data is reassuring investors, despite ongoing inflation and interest rate concerns.
Following their earnings reports, JPMorgan's shares climbed nearly 5%, while Wells Fargo’s stock surged over 6%.
Lingering Recession Concerns
Concerns about a potential recession have persisted, fueled by higher interest rates aimed at curbing inflation, leading to fears of a "hard landing." However, Barnum's insights suggest that consumers remain financially stable, supported by a strong labor market, indicating that a “no-landing” scenario may be more likely for now.
The SVB Collapse: A Cautionary Tale
The collapse of SVB marked the largest bank failure since the 2008 financial crisis. The bank, which had aggressively expanded during the tech boom, faced turmoil when rising interest rates resulted in significant losses in its bond portfolio. A panic-induced withdrawal of billions from customers ultimately led to SVB's downfall, prompting regulatory intervention to stabilize the banking sector.
First Citizens Bank acquired SVB, taking on $56 billion in deposits and $72 billion in loans at a discount. The FDIC estimated the collapse cost its insurance fund around $20 billion, leading to the launch of the Bank Term Funding Program to help banks manage liquidity challenges. Investigations into SVB's management highlighted aggressive risk-taking as a major factor in its failure.
Michael Barr, the Federal Reserve's Vice Chair of Supervision, labeled the incident a “textbook case of mismanagement.”
Ongoing Impact and Regional Bank Challenges
As of October, the ramifications of SVB's collapse continue to unfold. Congressional hearings are addressing calls for stricter regulations on banks with assets under $250 billion, a crucial discussion as smaller regional banks navigate the aftermath.
These regional banks, significantly affected by the collapse, are grappling with higher costs to attract and retain deposits while also facing substantial exposure to risky commercial real estate loans. With rising office vacancies and falling property values, these loans present increasing risks. To mitigate these challenges, the Federal Reserve has tightened capital requirements as part of broader reforms.
While major players like JPMorgan and Wells Fargo appear stable, smaller banks are still working through the ongoing fallout. Meanwhile, SVB is attempting to rebuild by implementing stricter risk management practices and lowering deposit requirements for tech startups. Remarkably, about 81% of SVB's clients have remained loyal, reflecting strong confidence in the institution.
In summary, while US bank stocks show resilience in the wake of recent challenges, the landscape remains complex, with ongoing scrutiny of risk management practices and regulatory reforms crucial for the sector's stability.
October 2024, Cryptoniteuae