Analysis: US bank deposits and trading in focus after rollercoaster month

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    Analysis: US bank deposits and trading in focus after rollercoaster month

    [1/2]JPMorgan Chase Bank is seen in New York City (U.S.A), March 21, 2023. REUTERS/Caitlin Ochs

    New York, March 27, 2007 (Reuters) – Analysts say that U.S. banks are closing the books on a turbulent quarter. They will be focusing their attention on trading revenue and deposits when they report earnings in mid April.

    Two high-profile bank closings earlier this month have shaken confidence in the sector. Now observers are focusing on whether banks will be more conservative and reduce lending or suspend stock buybacks. JPMorgan Chase & Co., the largest U.S. lender will report its first quarter results on April 14. The Bank of America Corp (BAC.N), will follow on April 18.

    Financial industry still reels from the dramatic events of this month, which rattled investors as well as whipsawed markets.

    The second and third largest closures in American history, Signature Bank and Silicon Valley Bank (SVB), were shut down by regulators. Authorities took unprecedented measures to protect the deposits of the bankrupt companies and introduced new measures to boost confidence. Eleven lenders then offered $30 billion to First Republic Bank (FRC.N). Under pressure from the Swiss government, UBS Group AG (UBSG.S.) purchased rival Credit Suisse Group AG CSGN.S in a hastily arranged deal.

    As volatile markets fuel client activity, the banks’ trading desks may have been helped by the ups and downs.

    Stephen Biggar, an analyst from Argus Research in New York told Reuters that trading profitability would be one of the most important things to watch after the market’s volatility. He said that it “can turn out to be lucrative, or unprofitable, depending on the key positions they have taken.”

    The impact on earnings on a wider scale could still be “limited” because most of the turmoil occurred in March, Oppenheimer analysts led Chris Kotowski reported in a report on Thursday.

    The Oppenheimer analysts stated that major banks will have to account for any unrealized losses in their long-term securities portfolios. This is to be aware of the possibility that the U.S. Federal Reserve might keep interest rates higher longer. After SVB collapsed, in part due to a $1.8billion loss on its bond holdings, the portfolios will be examined.

    Oppenheimer estimated that 25 banks, including some of America’s largest, held securities portfolios up to 29% of their tangible common stock. Because they have sufficient liquidity (or cash on hand) to meet the demand of depositors, larger banks can avoid having to sell securities at a loss.

    As topsy-turvy markets discourage companies from issuing stocks or bonds, investment banking divisions are likely to suffer. Oppenheimer predicts that total investment banking revenue for six of the largest U.S. banks will fall 40% in the first quarter compared to a year ago: JPMorgan Bank of America, Bank of America and Wells Fargo & Co, Citigroup Inc (C.N), Citigroup Inc, Goldman Sachs Group Inc, GS.N, and Morgan Stanley (MS.N).

    $1 TRILLION SHIFT

    According to JPMorgan analysts, the “most vulnerable” U.S. banks will have lost about $1 trillion in deposits over the past year. Half of these outflows occurred in March after the collapse of SVB.

    Analysts believe that the influx of deposits, which landed at the largest banks totaling billions of dollars, will not provide a significant boost to their earnings. This is because wealthy clients and companies have moved their money from deposit accounts to bonds or Treasuries where they earn a higher return.

    Analysts said that banks will likely suspend share buybacks due to the uncertain outlook. This will help to save cash. Biggar at Argus stated that lenders will likely set aside more emergency funds to cover losses from defaulted loans.

    Piper Sandler analysts wrote last week that investors are increasingly focused on rising costs of financing banks, which could impact earnings.

    They wrote that recent bank failures had led to a remarkable ongoing reevaluation of banks’ deposits and overall liquidity profiles, which will likely have ripple effect for many years.

    Reporting by Nupur anand and Tatiana Bautzer, New York; Editing and Lananh Nguyen are Diane Craft

    Our Standards: The Thomson Reuters Trust Principles.

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