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The Institutional Risk Analyst

© 2003-2023 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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Funding & Credit: Q1 2023 Bank Earnings Takeaways

April 17, 2023 | In this issue of The Institutional Risk Analyst, we ponder the key takeaway from Q1 2023 earnings. Just by coincidence, funding cost is the same takeaway our readers considered a year ago – namely the fact that interest expense for banks, REITs and other investors is rising faster than asset returns. Bank deposit rates must rise.


CNBC 4/14/23


Consider the example of JPMorgan (JPM), which reported record Q1 2023 earnings on Friday thanks to QE. Interest income rose 139% from Q1 2022, but JPM’s investor relations team decided that the 10-fold increase in interest expense was somehow not meaningful to investors. In fact, JPM’s interest expense was up over 900% YOY.



Likewise, Citigroup (C) apparently decided that investors would not find the increase in the bank's funding costs of interest to investors. In fact, Citi’s interest revenue increased 88% vs Q1 2022 but funding costs increased 377% year-over-year.



After our appearance on CNBC’s Squawk Box Friday, Citi’s investor relations teams decided to complain that we had incorrectly characterized the bank’s credit loss rate. In fact, we wuz wrong. Citi’s net loss rate is actually 5x higher than the same measure for all of the banks in Peer Group 1.



Years ago, we learned one of the more useful lessons in finance while working at Bear, Stearns & Co. The most important call or email from an aggrieved financial professional is often the one that is not sent. Sometimes you need to pick up the phone, dial the number and then put down the receiver before the call connects. Likewise with email.


Provisions for credit losses at Citi, the next shoe to drop, were up 560% YOY in Q1 2023. This was another remarkable metric that the veteran IR professionals at Citi thought was not meaningful to investors. Fortunately, they did allow that a 49% increase in credit losses since Q1 2022 was perhaps meaningful to investors.


Both managers and regulators are still fighting the last war in terms of bank risk, namely market risk due to sharply rising benchmark interest rates. The gap between bank deposit rates and that 4% yield on 90-day T-bills will close over the next year, forcing up prime bank loan rates towards low double digits. The productive economy of jobs and sales funds the necessary world of secured finance off the short end of the Treasury yield curve.


A year ago, Citi took $600 million out of loan loss provisions, this as part of the great rebalancing of post-COVID credit reserves. For this reason, much of the financial data from 2021 and 2022 is useless from an analytical perspective. But the simple fact is that Citi and other consumer lenders will be building credit reserves in anticipation of an extended recession through 2023.


Citi’s income was up over 80% sequentially, a legacy of the familiar pattern whereby Q1 of the year is the strongest. The fourth quarter of the year tends to be light at most large banks and especially at Citi. Thus the YOY comparison is less stimulating, with net income up just 7% vs Q1 2022. The same is true with most other banks, with Q1 being the best quarter of the year in terms of income.


Most observers continue to focus on deposit runoff at smaller banks as a sign of weakness, but perhaps that focus is misplaced. We remind our readers that the whole point of tightening by the FOMC is for banks to get smaller -- 10-15% smaller on average vs average assets or about $2 trillion smaller for the entire US banking industry. The issue is not whether your bank is getting smaller, but whether credit expenses are being managed as funding costs -- and loan defaults -- inevitably rise.



The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

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