Four trends to watch in second-quarter bank earnings

Several components of fee income, including mortgage banking, investment banking and consumer service charges, are expected to show strain in banks’ second-quarter results.

Investment banking fees will likely be down by 45%-50% year over year amid market volatility, according to Deutsche Bank analysts. The Deutsche analysts also expect weaker fee income from mortgages, since refinancings have largely dried up, and from the wealth management business.

Large and regional banks that have made consumer-friendly reforms to their overdraft programs may also feel the pinch. Customers of the 25 largest U.S. banks are expected to save $4 billion per year as a result of those changes, according to a recent analysis by the Pew Charitable Trusts.

On the flip side, trading has held up better than expected, led by fixed-income trading, according to the Deutsche Bank analysts.

And large banks with leading credit card businesses are likely to benefit from fees that result from higher card loan balances, according to CFRA analyst Kenneth Leon. He pointed out that the U.S. personal savings rate, which reached 18% earlier in the pandemic, ended May at 5.4%.

Rising wages, investments in technology and a resurgence in certain types of spending that fell earlier in the pandemic are all expected to put upward pressure on banks’ expenses in the second quarter.

In the first quarter, the industry recorded $133.8 billion in noninterest expenses, up 7.2% from the same period a year earlier, according to Federal Deposit Insurance Corp. data. That total included $67 billion in spending on employee salaries and employee benefits, the highest amount on record.

Wage increases have continued amid inflation that has hit a four-decade high. Bank of America and Truist Financial both recently bumped their minimum wages for U.S. employees to $22 an hour, while BMO Harris Bank committed to $20 an hour and JPMorgan Chase will pay between $20 and $25 an hour, depending on the worker’s location.

And after pandemic-era declines, banks are also spending more in areas such as marketing and employee travel, according to analysts at Wedbush Securities.

Also driving up expenses is higher spending on digital banking, data analytics and automation, though some of those investments are being offset by branch closures, the Wedbush analysts wrote in a recent research note.

With rising inflation leading to higher employee wages, alongside increased investments in technology, banks paying more expenses shouldn’t be “new or shocking,” according to Christopher McGratty, head of U.S. bank research at the investment bank Keefe, Bruyette & Woods.

While banks often report a “natural seasonal bump in costs” reflecting new expenses during the first and second quarters of each year, the question will be “how much falls to the bottom line,” McGratty said during an interview. 

Bank deposits climbed with little effort for much of the past two years, but the Federal Reserve’s interest rate hikes are threatening to revive cost pressures for banks.

Though the pressures are in their early days, depositors have taken notice of the Fed’s aggressive pace of rate increases and are beginning to push their banks to pay them more. 

Commercial depositors are increasingly asking for higher rates, bank consultants say, and some banks are feeling more compelled to meet those requests.

“You’re seeing rate competition come back to the market a little bit sooner than we would have expected,” Peter Serene, director of commercial banking at the consulting firm Curinos, said in a recent interview.

The development could push up banks’ interest expenses and therefore narrow their profits, so analysts are watching for any commentary from bank executives on the issue. They also are poring through bank filings to figure out which ones have more stable deposits — those that are less likely to leave the bank to chase better-paying options or ask for higher rates.

Banks with higher levels of consumer deposits should fare better because they are less likely to reprice quickly compared to commercial deposits, RBC Capital Markets analyst Gerard Cassidy wrote in a note to clients.

His report — entitled “Deposits, Deposits on the Wall, Who Are the Fairest of Them All?” — flagged Capital One Financial, Wells Fargo, Truist Financial and PNC Financial Services as institutions with a larger portion of consumer deposits.