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Lending Briefing: Big banks’ Q2 results and rising commercial loan volumes

  • Rising interest rates are a challenge for most financial market participants, but banks benefitted from this as lenders, helping to boost their Q2 bottom line.
  • Commercial loans grew by double-digits compared to last year, the strongest loan growth since the onset of the pandemic.
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Lending Briefing: Big banks’ Q2 results and rising commercial loan volumes

Net interest income boosts revenues in a tough quarter for US banks

It’s the second quarter earnings season, and the numbers are in at most of the top banks in the US. While most banks missed consensus estimates as they grappled with a challenging macro environment, their bottom line was rescued by a boost in net interest income. 

While rising interest rates are a challenge for most financial market participants, banks benefit from this as lenders, allowing for a wider spread between the rate they pay for deposits and the rate they charge for their loans. 

This spread is then reflected in the net interest income (NII) banks report on their income statement in their wealth management divisions, and the metric is expected to grow even further. Wells Fargo analyst Mike Mayo forecasted in a recent note that banks will report “the best NII growth in four decades over the next 6 quarters”.

However, higher interest rates don’t automatically translate into more revenues for banks. As borrowing becomes more expensive, banks lose on origination fees as lending volumes shrink. This is particularly relevant in the mortgage divisions for example, as well as investment banking. 

This quarter also revealed a tough time for financing corporate loans, with many markdowns on loans to finance deals. Rising interest rates were mainly to blame here as well, as investors shied away from leveraged loans. Bloomberg reported that the total Q2 losses reported by the big six US banks on corporate loans for sale stood at $1.32 billion.  

Here’s a quick overview of the NII growth reported by the banks with the largest wealth management businesses in the US – Bank of America, Wells Fargo and Morgan Stanley. 

Bank of America

Net interest income increased by $869 million, surpassing a forecasted $650 million rise, marking a 7.4% sequential increase to $12.55 billion in Q2 on a tax equivalent basis.

And in the third quarter of this year, the bank expects NII to rise by "at least $900 million, possibly $1 billion", according to CFO Alastair Borthwick.

"We expect it to grow again at a faster pace on a sequential basis in the fourth quarter," he said during an earnings conference call. 

Wells Fargo

Net interest income for Wells Fargo’s wealth management unit grew by 50% year-on-year to $916 million. The bank said this helped offset lower asset-based fees and transactional revenues.

This bottom line boost was welcomed given that the bank’s second quarter total revenue fell 16% to $17 billion and net income shrank by 48% to $3.1 billion from the same period a year before. Lower profits were also due to Wells Fargo increasing its provision for credit losses by $580 million.

The bank started the year expecting full year net interest income to grow by approximately 8% compared with 2021, but then raised its guidance to a mid-teens increase. 

“With the market now expecting not only more rate hikes but also larger ones, we currently expect net interest income in 2022 to increase approximately 20% from 2021”, said CFO Michael Santomassimo at the company’s Q2 earnings call.

Morgan Stanley 

Net interest income was up by 39% year-on-year to $1.7 billion in the wealth management division. Similar to other banks, this helped offset lower transactional revenues, which were down 54% from Q1 and 75% from Q2 2021 to $291 million. 

CEO James Gorman described the current macro environment as ‘very complicated’, given the Russian invasion of Ukraine, the long tail of the pandemic and inflation.

“I think it's important to say, though, it is not 2008 complicated. This is a different type of financial stress in the system. And frankly, the banking sector is much stronger than it was going into the last time we went through a major reset in '07, '08. Morgan Stanley is in particular -- I won't speak for others, but we're specifically in much better shape,” Gorman said at a conference call with analysts. 

Chart of the week

US banks are expected to post the strongest loan growth in Q2 since the onset of the pandemic, but the turbulent macroeconomic environment raises questions about the sustainability of this trend, according to S&P Capital IQ

Federal reserve data showed that total commercial bank loans increased 3.7% in the second quarter to nearly $11.4 trillion. Consumer loans were up by double digits compared to last year, driven by strong credit card balances.   

Quote of the week 

Goldman Sachs is holding off from new partnership opportunities this year, wanting to focus on integrating GreenSky, a BNPL lending platform in the home improvement space. 

“Our intention at the moment is to be focused on integrating these successfully and making sure we execute at a very high level. Certainly, as we get out to 2023 and 2024, we'll be more open to other partnerships and other meaningful things going forward. But at the moment, we're focused on really executing on what we put forward, which included, as we had highlighted, launching checking later in the year,” said CEO David Solomon at the bank’s Q2 earnings call. 

What we’re reading 

Too easy to borrow’: debt plagues young people despite China’s scrutiny of fintech microloans

Debt losses for buyouts top $1 billion and banks brace for more

Deutsche Bank is developing on a white-label BNPL product for merchants

New guidance from the CFPB on how banks and fintechs use consumer data

Fintech and transparency in SMB lending

What we’re writing

  • What’s the secret sauce of a successful bank/fintech partnership?
  • Data Snack: Credit and debit cards are king; BNPL’s ‘dangerous illusion’ is fueling overspending
  • Data Snack: US consumer credit remains healthy in Q1 despite macro headwinds

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