Ongoing economic growth amid elevated inflation data drove bank stocks and Treasuries lower last week. The focus shifts beginning late this week to company specific results and updates to key banking industry trends.
The BLS March Employment Situation report (April 5) found 303k net new jobs added in the month. Revisions netted an additional 22k. The usual categories of of Health Care (+72k), Government (+71k) and Hospitality (+49k) drove the gains. The U-3 Unemployment rate fell to 3.8% from 3.9% in February while the U-6 Unemployment rate was unchanged at 7.3%. The U-6 rate compares to a pre-lockdown January 2020 rate of 6.9%.
Final March PMI data reported by S&P Global (April 3) “point(s) to GDP having risen at an approximate 2% annualized rate in the first three months of the year. Confidence in the outlook for the coming year has also lifted higher, which should help to sustain solid growth into the second quarter.â€
With 1st quarter bank earnings results reports starting this coming Friday, I reviewed industry H.8 data for sector trends. The data shows industry Loans lower by -0.31% from the start of the year with only Real Estate Loans showing higher balances. Interestingly, an somewhat against conventional wisdom given the amount of hand wringing, CRE Loans drove the increase with non-seasonally adjusted balances higher by +0.92%. Within CRE, Multi-family Loans increased more than +2% while Construction & Development balances fell -0.48%.
Also noteworthy was the largest decrease in Consumer Loan balances since 1Q21. Credit Card balances were lower -3.62% non-seasonally adjusted but higher on a seasonally adjusted basis. Auto Loan balances were lower -1.43% which is the 6th consecutive quarterly decline.
On the liability side of the ledger, industry deposits increased +0.44% driven by a 4.3% increase in Large Time Deposits. When looking at just Small Domestic Banks, deposits increased 1.0% in the quarter and are higher by 3.1% from a year ago. Deposits other than large time deposits also experienced a modest increase for the 3rd consecutive quarter at Small Domestic Banks. The mix of Large Time Deposits to Total Deposits in the Small Bank subsegment increased to 13.1% from 12.4% at the end of December.
These industry trends support a narrative of stable funding in the quarter paired with flat loan balances. This combination should support asset yields repricing higher and a larger number of banks experiencing sequential Net Interest Income growth. Lower longer duration bond prices will likely cause some non-cash AOCI adjustments but I expect most banks to still see higher capital ratios.
In light of the ongoing economic expansion and strong labor markets, Net Charge-offs should remain low. I expect provision to outpace charge-offs to allow for further reserve build ahead of potential higher interest rate impacts on credit quality in future quarters. The big question is whether we begin to see positive earnings revisions following results? The nearby chart would seem to indicate industry sentiment is poised to move to the most positive levels since 2021.