JPMorgan, Citi and Wells earnings to unleash borrowing blitz by banks

After Friday’s earnings announcements, Bank of America Corp.
BAC,
+1.06%,
Morgan Stanley
MS,
+0.51%
and Goldman Sachs Group
GS,
+0.70%
follow with results next week.

Bond issuance from the six biggest banks after earnings is expected to reach $28 billion to $32 billion, according to a Bloomberg analysis of JPMorgan data.

“It’s in that ballpark,” Tom Murphy, head of investment-grade credit at Columbia Threadneedle, adding that a raft of proposed changes to U.S. and international bank capital requirements could feed into how much fresh debt is issued.

“There are a lot of moving parts from the perspective of banks’ capital needs,” Murphy said. “My short answer is there is probably going to be more issuance.”

See: Fed’s Michael Barr proposes new capital requirements for banks with $100 billion or more in assets

Optimism about interest rates

Last summer, only four of the six big U.S. banks borrowed in the bond market after reporting second-quarter earnings, according to Informa Global Markets. The tally reached $27.5 billion, with Goldman and Citigroup refraining from issuing bonds in that period.

For this year, the same six banks raised $35.75 billion, down from $88 billion for the same stretch of last year, according to Informa.

There’s also has been a pullback in overall issuance from the financial sector, which Murphy pegged at about 30% of total issuance in 2023, down from over 40% last year.

Higher borrowing costs play a role, with rates for major companies increasing as the Fed’s policy rate climbed about 500 basis points above the pandemic lows. However, debt issuers also tend to seek out favorable pockets in capital markets to issue fresh bonds.

Recent optimism about the U.S. economy as the Fed’s inflation fight has the stock market trading only about 7% below record highs. The S&P 500 index
SPX,
+0.85%
closed above 4,500 for the first time in 15 months on Thursday. It last hit a record high near 4,800.

While short-term bond yields have tracked Federal Reserve’s interest rate hikes higher, the benchmark 10-year Treasury yield
TMUBMUSD10Y,
3.778%
has edged down to about 3.77% as of Thursday from a recent high above 4%, helping bring borrowing costs by major corporations down near levels seen at the start of the year.

Big banks, huge deposits

Big U.S. banks also have so far avoided much of the difficulties hitting smaller lenders holding low-coupon loans and securities that have tumbled in value since the Fed started hiking rates last year.

Deposits at banks were about $1 trillion lower in June from a $17 trillion peak in the first quarter of 2022, according to a JPMorgan midyear outlook. Regional and small banks had about a $5.2 trillion share of the total deposit base, which was roughly 4% below levels at the end of 2022, but with “some stabilization in the cohort” seen in the first quarter.

“It really hasn’t been detrimental to these six large lending institutions,” Murphy said. His team also thinks big banks are better able to withstand any recession that might still unfold, and they like current yields on offer, “which are as good as in the fall of 2009.”

The yield on the ICE BofA US Corporate Index was pegged at 5.52%, versus 5.47% on Jan. 3.

Also boosting issuance forecasts has been plans for many big banks to increase dividends after the Federal Reserve’s stress tests in late June indicated they looked capable of withstanding a severe shock to the financial system and economy.

Read: JPMorgan, Goldman, Citi and Morgan Stanley boost dividends after Fed stress tests

–Vivien Lou Chen contributed reporting to this article