US Bank Earnings Surpass Wall Street Expectations

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1:27Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. A lot of movers out there in the marketplace, including the big banks, because, man, it's the busiest day I've ever seen for big bank earnings. Just all coming in on one day here. So we've been checking in with our good friend Herman Chan, who covers all the banks for Bloomberg Intelligence. So I guess my takeaway, Herman, is they beat expectations generally, and expectations were high coming into this quarter.

2:13What are they saying about the back half of the year? I guess that's probably the bigger issue. Yeah, that's right. That's the chief question on the earnings calls today. We had robust results, knocked it out of the park, particularly in equity trading. Can this be sustained, at least from the J.P. Morgan earnings call earlier this morning? Management said that while it's hard to replicate the second quarter earnings results from equity trading in particular, there's still a constructive backdrop. Some of the activity in the second quarter was really driven by the trading activity from SpaceX and the like that may be a bit more idiosyncratic to the quarter.

2:50But still, really strong trading results expected for the back half of the year. What are the banks with the big lending books like Wachovia, like Biave, like Citi? What are they saying about the credit quality out there? Yeah, credit quality has been really strong. You see that in Wells Fargo in particular. Their net charge-offs for the quarter loan losses were down about 10 basis points. And that was really led by much lower commercial loan losses in particular. So the commercial borrowers have been able to weather some of this economic insurgency and expectations for rates to be higher for longer.

3:25So we're actually pretty sanguine about the credit quality for the group, at least in the near to intermediate term. What are some of the return ratios that you and bank investors look at and how are they trending these days? Yeah, returns and return on tangible common equity in particular is the key banking metric that we look at. And those were strong across the board. You see this in J.P. Morgan's adjusted ROTC, 23%. Their target over the longer term, 17%. Even banks that are at the lower end of the spectrum, banks like a city, we're seeing ROTC at 13%. And their target for the year is only 10 % to 11%.

4:07So they're vastly outstripping their targets and their expectations. And that's happening across the board for the banks that reported today. All right. So in that context, how are the easing regulations on the banks, how have they impacted their performance and those types of ratios? That's right. So that's another positive story for the banks, particularly the big ones, where we have easing capital regulations that will create more flexibility on the balance sheet. So that's in terms of both buybacks, that's in terms of dividends, that's in terms of increasing their lending capacity. And that means there's less equity component on the balance sheet, which is inversely related to return.

4:55So returns will go higher systematically because there's lower equity capital ratios. So all in all, a really good story. You just saw from the stress test where after that, in the aftermath, things really lifted their dividends by 10, 11, 12 percent across the board.

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