Banking Crisis and Inverted Bond Yield: A Pre-Earnings Report Analysis for US Banks
The recent banking crisis, heavy borrowing from the Federal Reserve’s discount window, and the inversion of bond yields have significantly affected US banks, resulting in investors' anticipation of a possible recession.
- JPMorgan Chase & Co. will start the earnings reporting season on April 14 amid a significant banking crisis, sharp drop in bank stocks, and a possible recession signaled by the bond market.
- Banks experienced seismic changes due to a potential overhaul of the insured deposits system, a rush of deposits out of regional banks, and the Federal Reserve's Bank Term Funding Program to prevent further bank runs and failures.
- The bond market’s yield curves inverted to their widest levels in decades, indicating investors are piling into shorter-term debt as a haven for the predicted trouble ahead.
- During March, the interest yield on a two-year note rose to 5.015%, while the yield on 10-year Treasury notes fell to below 4% on the same day.
- Credit losses for banks may occur during a recession, which is a possibility since analysts have cut their earnings estimates for both big banks and regional banks.
- KBW Nasdaq Bank Index and SPDR S&P Regional Banking ETF have already lost a significant amount of value, prompting analysts to reduce their earnings estimates for banks across the board.
- KBW downgraded Goldman Sachs Group Inc. and Morgan Stanley because of their larger exposure to a slowdown in investment banking activity, among others.
- Analysts expect lower net interest income growth and margins, as well as higher expenses and lower buybacks for banks.
- First Republic Bank, JPMorgan Chase, Wells Fargo & Co., and Citigroup are among the US banks expected to report earnings in April 2023.
- Banks may shift towards a more defensive and conservative stance, causing pressure on net interest income, as they move their balance sheet holdings to more liquid average earnings assets with lower yields.
- The uncertain economic environment may also result in slower loan growth and a slew of downward revisions to guidance.