Big banks are suffering from credit pain, just not the kind we expected

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Everyone was watching US bank results for signs that consumers were struggling financially – but the pain came from elsewhere, particularly when it came to financing acquisitions.

Bank of America Corp.’s second-quarter earnings lagged behind. with profit of 320 million reported on Monday. The leveraged loan market has been closed for weeks as investors fled amid sharply rising interest rates. Total losses on corporate loans for sale — a mix of leveraged finance and other loans — reported by the big six US banks now total $1.32 billion in the second quarter. Goldman Sachs Group Inc., also reporting Monday, lost $225 million on such loans, ranking fourth on the list behind Morgan Stanley and JPMorgan Chase & Co.

Banks worldwide are still divesting about $80 billion worth of business, and losses like those suffered by US banks have also jeopardized the results of European banks. Ahead of second-quarter earnings, analysts at JPMorgan examined banks’ likely exposures based on their exposure to unsold media-reported loans. They made Bank of America the main player in these suspended deals, followed by Barclays PLC. Hot on their heels were Morgan Stanley, Citigroup, Deutsche Bank and Credit Suisse, in that order. Citigroup ended up not doing all that badly — so far on the list at #5 — and this type of analysis is only a rough guide. Credit Suisse and Deutsche will both report on July 27, with Barclays the next day.

Alastair Borthwick, Bank of America’s chief financial officer, said Monday that the bank doesn’t have a significant pipeline of more deals to write, so it should be able to de-risk relatively quickly. JPMorgan has also been de-risking since last year, trying to reduce its market share. That’s good news in some ways, but it could also reflect a drop in dealmaking consulting fees. Some M&A bankers say they’re only making new deals right now, which are likely to disappear off the books quickly and face no delays from regulatory or antitrust approvals.

M&A advisory fees were one of the better areas for banks in the second quarter as previously negotiated deals were announced or completed. But a slump in advisory fees for stock sales and debt issuance caused investment banking revenues to decline about 50% overall in the second quarter compared to the year-ago period.

Bond and stock trading desks have fared much better, taking advantage of the volatility and uncertainty that has plagued investors. Goldman reported the best results in trading in fixed income, commodities and currencies, with sales up 55% year over year in the second quarter; and second-best behind JPMorgan in equities trading, with revenue up 11% year over year.

Part of Goldman’s secret is the growth of its equity and fixed income financing business. Stock lending is done to hedge funds, and Goldman’s earnings in what is known as the prime brokerage firm are up nearly 40% year over year. In some cases, Goldman has taken market share from its competitors, particularly those in Europe. Its gains also came despite the stock market slump, which is hurting the value of hedge funds’ long positions. Citigroup, for example, reported a fall in prime brokerage balances in its business on falling stock values ​​last week. On the fixed-income financing side, revenue grew 82% year over year. This business is fueled by financing and restructuring loans originated by other companies such as mortgage brokers or fintechs. The bank said it also got a boost from the repo markets (or repo markets) in the second quarter.

The aggregate turnover of these two financing deals has accelerated for Goldman over the past two years. The bank says these are primarily market share gains and that the earnings are more permanent than its other trades. But with U.S. mortgage lending and refinancing falling sharply, stock markets still declining, and many fintechs running out of growth, there’s a chance those revenue gains will hit a wall for at least the rest of this year.

Broadly speaking, the lesson from the second quarter US banking results was that credit risks appear to be well contained for the most part. But unless interest rates and financial markets stabilize in the coming months, expect bank earnings from trading, investing and some forms of financing to slow down, potentially significantly.

More from authors at Bloomberg Opinion:

• Wells Fargo and Citi customers are still spending: Paul J. Davies

• UK companies are failing black professionals: Chris Hughes

• Inflation beast won’t rest for a long time: Allison Schrager

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He was previously a reporter for the Wall Street Journal and the Financial Times.

For more stories like this, visit bloomberg.com/opinion

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