Trump Tax-Cut Optimism Fades Into Trade-War Gloom at Top Banks
(Bloomberg) -- It was supposed to be the best of times for the biggest U.S. banks: Rising interest rates and corporate tax cuts would boost profitability and spur lending, while deregulation lowered costs.
The optimism didn’t last. Loan books probably expanded only slightly last quarter while revenue failed to match the acceleration posted in the first three months of the year, based on the latest analyst estimates. And the outlook isn’t brightening. A flattening yield curve and a potential trade war threaten to make the second half even worse.
“We’re not expecting very strong results for the big banks,” said Jim Shanahan, an analyst at Edward Jones & Co. “Management teams are still cautious. Corporate-tax reform hasn’t given them the confidence to invest in capital and hire people. It has a lot to do with concerns about this burgeoning trade war.”
Investors will get the first details on Friday, when JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. report second-quarter results. After the six biggest U.S. banks posted a 7 percent jump in revenue in the first quarter, analysts predict the second quarter’s bounce was less than half that, for a combined $109 billion, according to data compiled by Bloomberg.
Banks were supposed to be among the biggest beneficiaries of the tax overhaul. Wells Fargo Chief Financial Officer John Shrewsberry said in a January phone interview that he expected a flurry of activity as firms boosted capital expenditures and lower tax rates made some deals easier to complete. JPMorgan CFO Marianne Lake said the same month that the tax changes were a “big win for the economy” and the certainty would give clients “confidence to act.”
But the five largest banks are now expected to post a 4.7 percent drop in investment-banking fees, which include revenue from merger advice and helping companies sell new debt and equity. And the four biggest money-center banks probably boosted loans by only about 2 percent compared with a year earlier.
Chris Kotowski, an analyst at Oppenheimer & Co., said skepticism about how durable the tax cuts will be might account for mediocre loan growth.
“Maybe the view is there could be someone else in the White House in a few years and this could all be undone,” Kotowski said. “I don’t think the changes had much short-term influence.”
The souring outlook has weighed on bank stocks. The S&P 500 Financials Index fell for 13 consecutive days in June, the longest losing streak on record. It dropped 3.6 percent in the second quarter, the worst performance since the first three months of 2016.
Another headwind has been the flattening yield curve, which eats into banks’ profitability. The short-term rates banks typically borrow at are rising faster than longer maturities -- the levels at which they lend.
On the deals front, rainmakers completed about $140 billion of transactions for U.S. companies in the quarter ended June 30, according to data compiled by Bloomberg. That was just under half the amount finalized in the first quarter and 61 percent below the same period last year.
Yet there is a bright spot: Banks are sitting on a substantial backlog of deals waiting to clear the pipeline. Companies announced transactions totaling about $930 billion in the quarter, with about two-thirds still in the works, the data show.
And Richard Ramsden, an analyst at Goldman Sachs Group Inc., said he expects a pickup in loan growth in the second half of the year, citing comments from management teams that “tax-reform tailwinds” won’t show up until then. It probably won’t take much to appease bank-stock investors, Ramsden wrote in a July 9 note.
“Even an in-line quarter would be good enough to shore up investor confidence that banks can continue to see operating leverage and earnings growth trends,” he wrote.
Alastair Borthwick, Bank of America’s head of commercial banking, told investors in May the company may be able to expand its loan portfolio at a faster pace than growth in the U.S. economy. Optimism among corporate CEOs and better relationships with them would help the bank achieve that, he said, citing a lending pipeline through May that was better than in the previous year.
Despite large U.S. banks having missed out on the surge in lending and dealmaking expected after the nation’s tax overhaul, Kotowski at Oppenheimer said the companies’ shares remain an “incredible bargain.”
“Even though loan growth might only be 2 to 3 percent, with a slight rise in rates that’ll turn into mid-single-digit revenue growth,” he said. “I think sooner or later the math will just grind down the skeptics.”
©2018 Bloomberg L.P.