October 18, 2024 | Premium Service | With the 2024 election just weeks away, US equity markets are rallying on acceptable earnings results and the vast amount of liquidity that remains on the sidelines. The larger Street firms led by Morgan Stanley (MS) reported strong earnings on new securities issuance and investment banking transactions, but the interest rate side of the house continues to struggle with flat to down net-interest income.
In Washington, Democrats are quietly frantic as it becomes increasingly clear that the GOP is going to win the White House and retake control of the Senate in November. Last week Senator Elizabeth Warren (D-MA) issued a petulant letter to Michael Hsu, Acting Comptroller of the Currency (OCC), urging stronger regulation of Citibank, which Warren frets has become “too-big-to-manage.” Incredibly, Senator Warren demanded that the OCC consider “breaking up the bank,” an irresponsible public statement even for Warren. Fortunately, Senator Warren often says things she does not actually believe for progressive effect.
Meanwhile, the WGA Bank Top Indices continue to show a rebound for larger banks after several difficult quarters. Notice how the large cap Invesco KBW Bank ETF (KBWB) is starting to outperform as inflows into banks stocks increase. And no, these stocks are not expensive yet.
We expect managers to rotate back into large-cap financials in coming months, even as the process of creative destruction in the banking sector causes small bank M&A to increase. New York Community Bank (NYCB) is completing the destruction of the Flagstar mortgage business, announcing 700 more layoffs in addition to the 1,200 jobs lost in the sale of the warehouse unit to JPMorgan (JPM). The fact that NYCB is about to assume the Flagstar name only adds to the irony of this tragic mess.
The good news in bank earnings in Q3 2024 is the capital markets side of the house. Institutions from Bank of America (BAC) to Citigroup (C) to Goldman Sachs (GS) were all helped by the strong market trading and new issue underwriting results in Q3 2024. And all three banks have seen the profitability of the net interest margin side of the house narrow.
Citigroup