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Bank ETFs in Focus on Consumer vs Corporate Tug-of-War in Q2
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The latest quarterly results from America's major banks have been crucial as they represent one full-quarter of activity after the regional banking crisis unfolded in March. Q2 earnings from big six banks presented a kind of inconsistency — while consumer banking showed bouyancy (due to still-decent savings and pent-up demand after the Covid-phase), corporate banking appeared cautious (thanks to higher rates, sticky inflation and geopolitical crisis).
Resilient Consumers
Profits in consumer banking have surged due to increased credit card borrowing, higher loan charges, and robust consumer spending. On the contrary, corporate clients' cautious approach has negatively impacted the earnings of the big banks. JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , which have extensive consumer franchises, gained on the trend.
"The consumer is in good shape," JPMorgan CEO Jamie Dimon told analysts. “They are spending down their excess cash,” as quoted on Yahoo Finance. JPMorgan, Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Morgan Stanley (MS) and Well Fargobeat on both lines in Q2. JPM’s upbeat net interest income (NII) 2023 guidance is a positive.
Corporate-Led Slowdown
Recent bank earnings reports have revealed that the corporate influence on the sector is not upbeat. For instance, Citigroup saw its overall profits drop by 36%, hurt by its corporate and investment banking unit, which witnessed a 24% decline in revenues. Goldman Sachs’ (GS) profits also suffered due to the real estate chaos and dealmaking slump.
Other major banks, including JPMorgan, have also experienced a decline in investment banking fees. Morgan Stanley reported a decline in equities and fixed-income investment banking activity.
What Lies Ahead?
Going forward, macroeconomic and geopolitical conditions will influence corporate banking earnings. And why not? Mergers and acquisitions have witnessed a slowdown, with continuing economic uncertainty weighing heavily on potential deals. IPO activities were also downbeat and have opened up only in recent weeks.
A few factors that can help big bank earnings are a steady decline in inflation, a less-hawkish/dovish Fed, an improvement in the ongoing China-U.S. tensions, and a considerable upgrade in global economic growth. In fact, if such threats linger, we might reach a point when consumers become cash-strapped and consumer banking too starts to underperform.
On the other hand, regional banks have been struggling more or less. Their excessive exposure to struggling commercial real estate markets is a big threat. Any steeper Fed rate hikes in the coming days will make matters worse.
Lenders have already tightened their lending standards, reducing credit availability. This credit tightening has an immediate impact on small businesses and low-income households that heavily rely on regional banks for credit (read: Regional Bank ETFs: Value Play or Value Trap?).
ETFs in Focus
Against this background, investors can track financial ETFs like iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF (IYF - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF) and Vanguard Financials ETF (VFH - Free Report) . These funds have considerable exposure to the aforementioned stocks.
Goldman has moderate exposure in the aforementioned ETFs. It is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . Broader bank ETFs have performed better this week on the steepening of the yield curve and better bank earnings.
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Bank ETFs in Focus on Consumer vs Corporate Tug-of-War in Q2
The latest quarterly results from America's major banks have been crucial as they represent one full-quarter of activity after the regional banking crisis unfolded in March. Q2 earnings from big six banks presented a kind of inconsistency — while consumer banking showed bouyancy (due to still-decent savings and pent-up demand after the Covid-phase), corporate banking appeared cautious (thanks to higher rates, sticky inflation and geopolitical crisis).
Resilient Consumers
Profits in consumer banking have surged due to increased credit card borrowing, higher loan charges, and robust consumer spending. On the contrary, corporate clients' cautious approach has negatively impacted the earnings of the big banks. JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , which have extensive consumer franchises, gained on the trend.
"The consumer is in good shape," JPMorgan CEO Jamie Dimon told analysts. “They are spending down their excess cash,” as quoted on Yahoo Finance. JPMorgan, Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Morgan Stanley (MS) and Well Fargobeat on both lines in Q2. JPM’s upbeat net interest income (NII) 2023 guidance is a positive.
Corporate-Led Slowdown
Recent bank earnings reports have revealed that the corporate influence on the sector is not upbeat. For instance, Citigroup saw its overall profits drop by 36%, hurt by its corporate and investment banking unit, which witnessed a 24% decline in revenues. Goldman Sachs’ (GS) profits also suffered due to the real estate chaos and dealmaking slump.
Other major banks, including JPMorgan, have also experienced a decline in investment banking fees. Morgan Stanley reported a decline in equities and fixed-income investment banking activity.
What Lies Ahead?
Going forward, macroeconomic and geopolitical conditions will influence corporate banking earnings. And why not? Mergers and acquisitions have witnessed a slowdown, with continuing economic uncertainty weighing heavily on potential deals. IPO activities were also downbeat and have opened up only in recent weeks.
A few factors that can help big bank earnings are a steady decline in inflation, a less-hawkish/dovish Fed, an improvement in the ongoing China-U.S. tensions, and a considerable upgrade in global economic growth. In fact, if such threats linger, we might reach a point when consumers become cash-strapped and consumer banking too starts to underperform.
On the other hand, regional banks have been struggling more or less. Their excessive exposure to struggling commercial real estate markets is a big threat. Any steeper Fed rate hikes in the coming days will make matters worse.
Lenders have already tightened their lending standards, reducing credit availability. This credit tightening has an immediate impact on small businesses and low-income households that heavily rely on regional banks for credit (read: Regional Bank ETFs: Value Play or Value Trap?).
ETFs in Focus
Against this background, investors can track financial ETFs like iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF (IYF - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF) and Vanguard Financials ETF (VFH - Free Report) . These funds have considerable exposure to the aforementioned stocks.
Goldman has moderate exposure in the aforementioned ETFs. It is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . Broader bank ETFs have performed better this week on the steepening of the yield curve and better bank earnings.