AMERICAN BANKERS ARE RIDING HIGH. WHY ARE THEY SO WORRIED? / THE ECONOMIST

Take a beat

America’s bankers are riding high. Why are they so worried?

Their latest earnings do not represent unalloyed good news

Photograph: Getty Images

It might seem like a wonderful time to be an American investment bank. 

Over the past year, the country’s lenders have handed shareholders gains of 27%, far outstripping the 10% for other stocks outside the technology sector. 

They have ridden a wave of strong interest income, heavy trading and a surge in dealmaking. 

Soon they will face less red tape, too. 

Viewed in this light, conditions could hardly be better.

Squint a little, though, and things are starting to look rather less rosy. 

The price-to-earnings ratio for the KBW bank index is 14.5. 

It has not often been higher over the past 20 years, except during the global financial crisis of 2007-09 and the covid-19 pandemic, two periods during which earnings collapsed. 

Uncertainty about tariffs is still high, and gauging their impact is harder than ever owing to the federal government’s shutdown, which has halted releases of economic data. 

Tricolor and First Brands, two heavily leveraged private firms, recently went bankrupt. 

In doing so they raised worries about the health of America’s weaker corporate borrowers, and how exposed creditors might be.

This glass-half-full, glass-half-empty dynamic was on full display as banks announced their third-quarter earnings. 

Results released by JPMorgan Chase, Goldman Sachs, Wells Fargo and Citigroup on October 14th were far better than analysts had expected. 

So were those of Bank of America and Morgan Stanley, released the next day. 

Their share prices rose by 4% and 5%, respectively.

But the rally was not universal. 

Goldman’s share price fell by around 2% on October 14th. 

Quarterly profit rose by 37% year on year to $4.1bn—well above the median forecast of $3.6bn, even if revenue from the share-trading division missed estimates by around $200m. 

Although the bank has done better than most of its peers this year, and its share price is still up by around a third, investors’ hopes are so high that only barnstorming results will do.

Both Jamie Dimon and David Solomon, bosses of JPMorgan and Goldman respectively, warned of frothy markets. 

Mr Solomon noted “a fair amount of investor exuberance”. 

Mr Dimon went further, saying the collapse of Tricolor and First Brands could be signs of worse to come. 

“When you see one cockroach, there are probably more,” he warned. 

JPMorgan’s loss of $170m, sustained from the bankruptcy of Tricolor, was “not our finest moment”, according to Mr Dimon. 

The bank’s shares dipped by 2%, and it raised its provision for credit losses by 9%, to $3.4bn.

Private eye

Worries about the most opaque corners of American lending have grown over the past month. 

The S&P business-development-company index, which tracks the performance of firms that invest in private loans, has fallen by 15% this year. 

That puts it below its level when markets spasmed in early April, in response to President Donald Trump’s announcement of swingeing tariffs. 

According to Moody’s, a credit-rating agency, the “golden era” for such investors is over. 

Greater economic uncertainty and low credit spreads will make strong returns difficult to come by, even without further insolvencies.

Threats from the riskier parts of America’s credit markets could ripple back to its banking system. 

In recent years, bank loans to non-bank financial institutions—including specialised lenders such as Tricolor, as well as private-credit firms—have ballooned. 

According to research by the IMF, banks accounting for more than half the sector’s assets have exposure to non-bank lenders which is greater than their buffers against unexpected losses.

Big lenders still have some things to look forward to. 

If the wobbles in private markets die down, tariffs do not tank the economy and the artificial-intelligence boom does not turn into a bust—three admittedly big “ifs”—then lenders will be well-placed to make the most of a wave of Trumpian deregulation. 

Bank executives are excited about the loosening of capital requirements resulting from a range of rules due to be changed over the coming years. 

Should such changes materialise, analysts believe they may unlock more than $200bn in capital. 

America’s top bankers may, in other words, shortly be in reach of a prize they have chased for years. 

That is nice. 

The problem is that shareholders expect perfection.