US bank shares jump on interest income and deals optimism, but outlook mixed

WASHINGTON (Reuters) -Big U.S. banks on Tuesday said higher interest rates had helped boost profits in the second quarter, causing shares to spike, but a pullback in consumer spending, slower loan growth and increased deposit costs may cloud the outlook for the sector.

Signs of a revival in investment banking, which has been in the doldrums as higher rates and economic uncertainty put a damper on deals and trading, also drove share gains, with Morgan Stanley (NYSE:) on Tuesday predicting an uptick in some areas of M&A.

Bank of America (NYSE:) and Bank of New York Mellon (NYSE:) Corp, two of the country’s largest lenders, earned a windfall from charging clients higher interest rates as the Federal Reserve raised borrowing costs to rein in stubborn inflation.

Bank of America’s net interest income (NII), which measures the difference between what banks earn on loans and pay out on deposits, rose 14% to $14.2 billion in the second quarter, helping it to beat Wall Street estimates. The bank said it expects full year NII to be up about 8% at about $57 billion.

NII gains also helped drive a better-than-expected performance in BoA’s global markets business, which was also boosted by a strong performance in bond, currency and commodities trading.

BNY Mellon also beat analyst estimates thanks to a 33% rise in net interest income to $1.1 billion, while PNC Financial Services Group (NYSE:), a major regional lender, reported a 15% jump in NII to $3.51 billion for the second quarter.

The bank’s full year NII outlook remains unchanged at 20% growth, Chief Financial Officer Dermot McDonogh told analysts.

That was in contrast to U.S. custodian bank State Street (NYSE:) warning on Friday of a further decline of 12-18% on NII on a sequential basis, driven by lower deposit levels. Deposits at large banks have been dropping as consumers move money in search of higher yields.

“Net interest margin seems to be somewhat increasing and the earnings seem to be good,” said Robert Pavlik, senior portfolio manager at Dakota Wealth, but added some investors were waiting on more regional bank earnings to get a better picture of the sector outlook before rejigging their portfolios.

“A lot of people are just waiting for a little bit more on the earnings front.”

Shares in BofA and BNY jumped around 5% on Tuesday, while Morgan Stanley’s stock surged more than 7% and was on track for its biggest daily percentage gain of 2023.

The Banks index was up 2%, while the KBW Regional Banking index was up more than 3%, both to their highest levels since late March.

JPMorgan Chase (NYSE:), Wells Fargo (NYSE:) and Citigroup (NYSE:) likewise said on Friday profits rose on higher rates and painted a picture of a resilient economy, but also warned of risks with U.S. consumers spending less and loan growth expected to slow.

Those warnings were echoed on Tuesday by PNC, which cut its forecast for full-year NII, casting a shadow over its earnings beat. The bank estimated NII will rise 5% to 6% in 2023 from last year, compared with its previous forecast of 6% to 8%. That decline is due to modestly lower loan growth and slightly higher deposit costs.

The results follow a tumultuous first quarter in which a banking crisis, triggered by the collapse of Silicon Valley Bank, led panicked consumers to yank deposits. That has forced some banks to offer consumers higher returns.

Charles Schwab (NYSE:) on Tuesday said its NII had slumped 10% to $2.29 billion in the second quarter, as some clients have been moving cash to alternatives that fetch better returns.

Still, Schwab’s stock jumped about 14% on better-than-expected earnings and guidance from CEO Walt Bettinger that daily cash outflows were slowing, while PNC rose as much as 4%.

DEALS HOPE

Wall Street titan Morgan Stanley said NII of $2.2 billion was virtually flat, and that the bank did not expect NII to expand. Overall, its profit slipped 18% in the second quarter as a fewer deals hurt investment banking revenues.

Sluggish deals have been a sore spot across Wall Street with global investment banking activity plunging to $15.7 billion in the second quarter, the lowest since 2012, according to Dealogic.

But investors were cheered by Morgan Stanley’s positive outlook for M&A, with Chief Financial Officer Sharon Yeshaya telling Reuters on Tuesday that investment banking was expected “to lead the recovery in the next quarter.”

M&A is picking up in industries such as financials and energy, and the bank’s backlog of deals is growing, she later told analysts.

While investment banking and trading were also a drag on earnings for big banks on Friday, JPMorgan likewise said the bank was seeing “green shoots” in trading and investment banking.

Goldman Sachs (NYSE:), a Wall Street deals powerhouse, reports earnings on Wednesday.