Big US bank stocks rally behind regional peers amid varying NII projections

Share performance at the four biggest US banks lagged behind a rally in regional banks during the early part of the second-quarter earnings season amid differences in net interest income projections among the major lenders.

The large capitalization KBW Nasdaq Bank Index was up 3.6% between July 11 and July 22, while the KBW Nasdaq Regional Bank Index gained 10.2%, participating in a broad rotation into smaller capitalization stocks. Disappointment over net interest income (NII) at Wells Fargo & Co. helped drive the bank's shares down 6.0% on the day it reported earnings, while Bank of America Corp.'s stock rose 5.3% after it set out a path to a rapid rebound in NII over the second half of the year.

Wells Fargo, Bank of America, Citigroup Inc. and JPMorgan Chase & Co. all benefited from strong results in capital markets operations that contributed to year-over-year increases in EPS at three, with JPMorgan leading the pack with a 28.8% jump, according to data from S&P Global Market Intelligence.

Big banks have vastly outperformed smaller banks so far this year after recent woes at New York Community Bancorp Inc. However, the path off NII bottoms has appeared clearer for the regionals, while asset sensitivity has clouded the outlook for the big banks as expectations for rate cuts have solidified once again. Lower rates could also create an off-ramp for strained commercial real estate borrowers at regionals with large concentrations.

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NIM compression

All four of the biggest banks posted sequential declines in net interest margins (NIM). Some late-cycle pressure on deposit costs among particularly rate-sensitive, wealth management customers was also evident.

Wells Fargo said a second-quarter increase in pricing on sweep deposits and advisory brokerage accounts would reduce its NII by about $350 million in 2024, and it now expects NII to be down 8% to 9% for the year compared with 7% to 9% previously.

Bank of America reported an acceleration in increases in rate paid in its wealth management unit. The bank prices "across the board" to achieve deposit increases a little faster than growth in the economy, Chairman and CEO Brian Moynihan said during a conference call.

Broadly, however, executives described easing pressures on deposits. The sequential increase in Wells Fargo's cost of interest-bearing deposits declined to 12 basis points from 17 basis points in the first quarter and 25 basis points in the fourth quarter of 2023.

Ending period deposits were down $114.16 billion, or 1.6% sequentially, across the four banks together, reflecting seasonal factors. "We have a lot of customers who pay a lot of taxes in that quarter," Moynihan said.

Normalization, not deterioration

Credit provisions increased sequentially at each of the four banks, including an increase of $1.27 billion at JPMorgan Chase to $3.05 billion that largely reflected a reserve build for continued growth in credit card loans.

Executives said credit performance continued to meet expectations after the historically low loan loss rates in recent years. Bank of America said it still expects its credit card net charge-offs (NCOs), which account for most of its NCOs, to stabilize in the second half of the year, with delinquencies already plateauing.

"When it comes to card charge-offs and delinquencies, there's just not much to see there," JPMorgan Chase CFO Jeremy Barnum said during a conference call. "It's still normalization, not deterioration."