Everything is awesome … for banks

Rob Armstrong (0:06)

Pushkin.

On Wall Street, Christmas comes not once, but four times a year. Every quarter we have earnings season, and investors and analysts get to unwrap the results from their favorite companies. Well, Christmas in July is here, second quarter earnings season is beginning, and it is beginning, as it always does, with an avalanche of bank results. Just this morning, we had JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs, and all of them reported very healthy numbers. This is Unhedged, the Markets and Finance podcast from the Financial Times, and Pushkin, I am Rob Armstrong, beaming to you from Unhedged World Headquarters in downtown New York City. And today, I'm lucky to be joined by head of the Financial Times, Lex Column, and famous office shorts wearer, John Foley. Hi, John.

John Foley (1:16)

Hi, Rob.

Rob Armstrong (1:17)

Are you wearing shorts today?

John Foley (1:18)

No, I'm wearing full length jeans today.

Rob Armstrong (1:20)

But our producer, Jake, is wearing shorts. That's the important thing.

John, let's just count the ways that banks can make money from a booming tech world. So, the most obvious one, equity offerings. A huge company like SpaceX does an IPO, the banks on the deal take a fee, 7% of the total or whatever it is. That's just money straight in the door. What else should we think about?

John Foley (1:43)

Well, a big source of profit. This quarter has been trading stocks, right? So, they trade stocks on behalf of clients. They take a spread, basically, between the buy and the sell price. And they also do a lot of lending to hedge funds and other investors. And that's a big part, especially for Goldman, is making short term loans. And then, there's also the advisory business, which is basically M&A, right? Helping companies buy each other, which... And those fees are not as exciting as equity right now, but they are all up at all of the big banks except for Citigroup.

Rob Armstrong (2:09)

So, I don't know where to start with these numbers. They were awesome from the banks. Everyone was expecting great numbers and these were even greater. What really stood out to you?

John Foley (2:18)

Well, they are indeed... Yeah, they are great numbers. So, the profit numbers are very healthy. Revenue is growing very rapidly. It's kind of crazy when you think that companies like Bank of America, for example, huge, very old, slow-moving lender is growing its revenue at 15 percent a year, which is that's how fast Microsoft is growing. So really, these companies have had a kind of second crack at youth. And one of the things that's driving this, the main thing that's driving it is tech. Big deals like the SpaceX IPO that created a bonanza of fees.

Markets are just very exuberant at the moment, so equities trading is going great for all of these banks.

Rob Armstrong (2:53)

So, equity trading revenues, JP Morgan up 86%, Bank of America up 70%, Citibank, who's terrible at trading equities, by the way, even their equity trading revenues was 45%, Goldman 72%, so there was a bonanza on the trading desks for reasons we've been talking about on this show for a long time now. SpaceX IPO, mad churn in chip stocks, the list goes on, but I want to note some other good stuff here.

Card volumes, meaning how much are people spending on their debit and credit cards. JP Morgan, Bank of America, Citi, three big issuers, all up in double digits or near double digits, so consumers are out there spending money. Credit quality was pretty good too. I didn't notice anything going sour out there in terms of loan quality, did you?

John Foley (3:53)

No, and actually the credit costs of the amount that the banks have to put aside for bad debt went down at definitely the Bank of America and JP Morgan, who are two of the biggest card issuers.

Rob Armstrong (4:03)

And net interest income, meaning the difference between what they pay for their money and what they earn on their money, which is of course what a bank is, pays for money in one place and then sells it someplace else for slightly more money.

Those all rose at a healthy rate. Net interest income results were all up in the double digits. So incredible quarter all around. And yet the stocks aren't up very much in early trading this morning. What's going on there, John?

John Foley (4:35)

Well, if you look at how the bank stocks have performed this year, they've done really well. None of this is terribly surprising, I think. We've known that banks are doing very well. We know the economy is in a pretty benign state. We've known that AI and hyperscalers like Alphabet and Amazon are generating a bunch of fees and all the capex and investment in data centers is keeping the economy humming.