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Bank Updates: Thus Far, No Degradation in Business or Customer Credit Metrics or Signs of Aggregate Consumer Pullback

Thomas Paulson
Jul 15, 2022
Bank Updates: Thus Far, No Degradation in Business or Customer Credit Metrics or Signs of Aggregate Consumer Pullback

JP Morgan Chase

  • JP Morgan Chase’s 2Q22 earnings were solid and the company's update revealed no deterioration in consumer credit, delinquencies, or charge-offs. However, there was a build of reserves to protect capital in a potential economic downturn—given a more dour economic outlook—as is their regulatory requirement.
  • JP Morgan's CFO Jeremy Barnum JP Morgan's CFO Jeremy Barnum intentionally and explicitly said, “We have yet to observe a pullback in discretionary spending…with travel and dining growing a robust 34% year-on-year overall. And with spending growing faster than incomes, median deposit balances are down across income segments for the first time since the pandemic started, though cash buffers still remain elevated.”

Wells Fargo

  • Wells Fargo’s CEO Charlie Scharf observed that its lower-income debit customers are reducing spending compared to last year’s stimulus boost and that overall spending had begun to moderate in May and June. That said, he also stated that there are no signs of stress or risk with their customers (vis-a-vis account cash levels, delinquencies, etc.). Those signals apply to both consumer and commercial customers. The same is true of JP Morgan’s business and customers.

U.S. Bancorp

  • On the health of its consumer customers, U.S. Bancorp’s CEO Mike Cerere stated, “[Our customers are] still spending dollars that they've not spent over the past few years [and deposit balances are up 2-3X from where they were pre-pandemic] ... We’re still seeing [spending] strength [out] there.” Like with Wells, U.S. Bancorp observed that for less affluent customers they are witnessing a shift in spending from discretionary to necessities.


  • Citigroup’s CEO Jane Fraser shared, “Consumer spending remains well above pre-COVID levels with household savings providing a cushion for future stress. And as any employer will tell you, the job market remains very tight. Similarly, our corporate clients see robust demand and healthy balance sheet with revenue softness attributed to supply chain constraints so far. While a recession could indeed take place over the next 2 years in the U.S., it's highly unlikely to be a sharper downturn as others in recent memory. I'm just back from Europe, where it's a different story. We expect a very difficult winter is coming, and that's due to disruptions in the energy supply. There is also increasing concern about second-order effects on industrial production and how that will affect economic activity across the continent. And the mood is, of course, further darkened by the belief that the war in Ukraine will not end anytime soon. In Asia, a rebound in China also faces some constraints given the potential for future lockdowns, the amount of leverage in the Chinese economy and stress in their property sector [is severe].”
  • Jane went on to say about their U.S. consumer credit card business, “You can see how resilient the consumer is in the U.S. through the elevated payment rates and the low level of credit losses. They have, however, shifted their spend far more to travel and entertainment, which are now outpacing 2019 levels.”

In our view, these management teams feel highly confident in the outlook for their businesses and growth strategies, and despite the risks of a recession, highly confident about their way forward. There are three primary contributors to that confidence, in our opinion: (1) loan growth and credit risk trends are highly favorable; (2) interest rates have begun to normalize which is driving the net interest margin and revenues meaningfully higher; and (3) the massive disruption to FinTech and crypto is undermining their disruptive threat to the banking industry (a threat that was fueled by lots capital at a very low cost—call it zero cost of capital).

We have written about how the digitally-native brand and delivery disruption threat to retail has recently been neutered with the correction in the stock market and what that meant to CREs (a better outlook for leasing and rent collection). The same applies here to consumer credit and retail branches. These three factors, along with the realities of work-from-home and the changes to consumer mobility, likely make these large banking brands more likely to seek new retail locations for market expansion and network optimization.

In other words, banks need capital (deposits plus equity) to grow, and their cost of capital is a governor of their margin rates and growth. In addition, banking is a strictly and highly regulated industry which adds compliance restrictions and significant expense. FinTech was provided bountiful capital by Wall Street and VCs, its cost of capital was incredibly low, and it has substantially lower regulation and regulatory expense. These combined created substantial competitive pressure on the banking industry’s growth and profitability. With that competitive disruption risk now subsiding, this is a new and sunnier "environment" for the banks and their branch networks. That should be kept in mind by CREs and brokers.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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