What Wall Street CEOs are saying about the state of the economy

The first week of US earnings season kicked off with an almost clean sweep of better-than-expected results – 14 of the 15 companies that reported second quarter earnings beat estimates.

The focus was on major US banks including JPMorgan (NYSE: JPM), Citi (NASDAQ: C) and Wells Fargo (NASDAQ: WFC) – All of which beat consensus revenue and earnings expectations as the Fed’s hiking cycle boosted net interest margins.

Momentum followed through to this week, with another sweep of better-than-expected earnings from major banks including Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC) and Morgan Stanley (NASDAQ: MS).

But mixed earnings from high-profile names like Tesla, Netflix and TSMC are beginning to dampen the so-far solid earnings season.

Earnings transcripts and C-suite letters from the banks are an interesting read because they provide great insight into various tidbits of the economy and financial markets. In this wire, we’ll summarise some of the key takeaways and quotes from the major banks.

The State of Consumer and Businesses

Banks are seeing signs that the economy is slowing but it’s far from recessionary.

• “Credit card spending remains strong, but the rate of growth has slowed from the outsized growth rates we saw for 2022.” – Wells Fargo
• “Debit card spend was flat in the second quarter compared to a year ago, spending on fuel due to lower gas prices, home improvement and travel at the largest declines compared to last year.” – Wells Fargo
• “We're trying to be really clear here. The consumer is in good shape. They're spending down their excess cash. That's all tailwinds. If even we're going to recession, they're going in with rather good condition with low borrowings.” – JPMorgan
• “Credit normalisation is happening faster in retail services given the profile of the portfolio. And overall, I'd say we're seeing a more cautious consumer, but not necessarily a recessionary one.” – Citi

The commercial front is also slowing down.

• “And on commercial, we saw a little bit of a slowdown in this quarter driven by higher paydowns from borrowers and weaker customer demand as opposed to any credit availability from us.” – Goldman Sachs
• “We are still open for business for loans. So, while loan growth has slowed, it's generally remained still ahead of GDP, and commercial client conversations remain solid as our clients seem to be waiting for some of the economic uncertainty to lift before borrowing further.” – Goldman Sachs

Credit Risks

Credit markets are beginning to show some signs of stress but not widespread deterioration. Net charge-offs (the debt that’s likely to default) is increasing, but they are still at relatively low levels.

• “While consumer credit performance remained solid overall, and we've continued to take incremental credit exciting actions across the portfolios, we expect consumer net loan charge-offs will continue to gradually increase.” – Wells Fargo
• “I think we still see this as a normalisation, not a deterioration story when we talk about consumer credit. Actually, revolve per account has still not gotten to pre-pandemic levels actually.” – JPMorgan
• “Net charge-offs have continued to increase from historical low levels, but overall credit quality was strong and consumer and business balance sheets remain healthy.” – Citi
• “For context, the credit card net charge-off rate was 2.6% in Q2 and remains well below the 3.03% pre-pandemic rate in the fourth quarter of '19.” – Bank of America

Net interest income

Higher rates are boosting net interest margins, which helped offset headwinds like higher funding costs, changes to deposit mix and elevated costs.

• “At the beginning of the year, we expected full-year net interest income to grow by approximately 10% compared with 2022. We currently expect full year 2023 net interest income to increase approximately 14% compared with 2022.” – Wells Fargo
• “Growth in net interest income from a year ago was driven by the impact of higher rates partially offset by lower deposit balances as customers continue to reallocate cash into higher-yielding alternatives.” – Wells Fargo

But there’s a little bit of uncertainty as to what the next 6-12 months might look like.

• “[The] last time I looked at the forward curve, we had one, possibly two hikes this year, and then as many as five declines next year. So, there's a lot between here and there. And I think we're taking the next three to six months to figure out … exactly how we feel about 2024.” – Bank of America
• “Looking towards the rest of the year, we do not expect NII to expand. Results will be a function of our deposit mix and the trajectory of various rates.” – Morgan Stanley

Capital markets

Capital market activity is beginning to improve from historically low levels.

• “.. there are a number of structural catalysts that should lead to increased levels of activity and we're seeing it begin to pick-up in a few spots already, particularly equity capital markets and M&A dialogue.” – Goldman Sachs
• “But when I go back and I look historically at other periods where the macro environment has created sharp drops in investment banking activity, they tend to last for a year or so and then they start to improve. And so I think we're starting to see that here. It definitely feels better.” – Goldman Sachs
• “The investment banking returns right now are at a very, very significant low but we do have a 14% RoE to date in Global Banking and Markets. So an improved environment should help us.” – Goldman Sachs

Commercial real estate

Commercial real estate faces a mountain of debt in the rising rate environment. Luckily, most of the major banks have minimal exposure.

• “The office market continues to be weak and the composition of our office portfolio is relatively consistent with what we shared with you in the first quarter. As Charlie mentioned, our CRE teams are focused on surveillance and derisking, which includes reducing exposures and closely monitoring at-risk loans.” – Wells Fargo
• “As a reminder, commercial real estate office credit exposure represents less than 2% of our total loans. And this is an area where we've been quite intentional around our client selection, portfolio concentration, and deal structure over many years.” – Bank of America