"US Major Banks' Earnings Surprise, Negative Impact on Small Banks?"

JPMorgan Chase, Wells Fargo, and other major U.S. banks' earnings surprises are momentarily making the global financial markets forget the Silicon Valley Bank (SVB) collapse that shook the markets this spring. However, this week, earnings reports from regional banks that were directly hit by the crisis are scheduled to be released. There are concerns that regional bank-related risks may resurface following these earnings announcements.

[Image source=Reuters Yonhap News]

According to Wall Street on the 17th (local time), the small and medium-sized regional banks reporting earnings this week include Western Alliance, Citizens Financial, M&T Bank, U.S. Bancorp, and Zions Bancorporation. The Wall Street Journal (WSJ) reported, "Last week's strong earnings from some large banks may make people forget the banking crisis earlier this year, but as regional banks release their earnings this week, hidden offstage signals may come back into focus," adding, "The large banks' earnings include bad news for smaller banks."

Last week, major banks such as JPMorgan and Wells Fargo, which kicked off the Q2 earnings season, posted earnings surprises. JPMorgan Chase, the largest U.S. bank, announced that its Q2 net income surged 67% year-over-year. Earnings per share were $4.75, significantly exceeding the estimate of $3.97. During the same period, Wells Fargo also recorded a 57% increase in net income compared to a year ago. Its earnings per share of $1.25 also surpassed the estimate of $1.16.

Notably, the strong performance of these major banks was attributed to high interest rates and the regional bank crisis. Following SVB's collapse in March, concerns around regional banks increased, leading to a significant migration of deposits to large banks. Analysts even suggest that these banks benefited indirectly from the unease surrounding smaller regional banks. Additionally, rising interest rates expanded the net interest margin?the gap between loan and deposit rates?which further supported their strong earnings. This dynamic also explains why regional bank stocks, including the KBW Regional Banking Index, slid on the 14th despite the large banks' strong earnings. However, regional bank stocks closed higher on that day.

Investors are expected to closely watch deposit-related figures in this week's regional bank earnings reports. Regional banks, which have already lost substantial deposits to large banks, may face even greater challenges due to the impact of higher deposit rates. All four banks that reported earnings on the 14th saw significant increases in deposit-related costs.

In particular, the WSJ pointed out that unlike large banks such as JPMorgan and Wells Fargo, which hold substantial deposits in no-interest accounts and operate lending and credit card businesses, regional banks lack such defensive measures. For example, State Street, a regional bank whose stock plunged after releasing earnings, saw its no-interest deposits decline by more than 20% quarter-over-quarter at the end of Q2. This decrease far exceeds Wells Fargo's 7% decline during the same period. The WSJ noted that State Street's situation could be a warning sign, and investors might react harshly to deposit-related news in this week's earnings reports.

Besides regional banks, major banks such as Morgan Stanley, Bank of America (BoA), Goldman Sachs, and American Express will also release their earnings this week. Investors are keen to see whether these large banks will continue the earnings surprise trend set by JPMorgan and Wells Fargo. The strong earnings of major banks indicate that U.S. consumers and businesses continue to borrow and spend, which contributes to growing expectations for a soft landing of the economy.

This content was produced with the assistance of AI translation services.