Opening bell earnings season is well underway, and the six biggest US banks just reported a double-digit percentage surge in trading revenue for the first quarter of this year.
And instead of massive loan growth for everyday consumers and mid-sized businesses, banks are pouring money into their trading desks, financing hedge funds and backing private credit funds.
Well, this strategy is driving huge profits.
As banks tap into excess capital freed up by relaxed regulations.
So how sustainable is this Wall Street revenue boom?
Well joining me this morning to weigh in is Nathan Stovall, Director of Financial Institutions Research at S&P Global Market Intelligence.
Good morning, Nathan.
Thank you so much for joining us.
Soge political tensions simmering in the Middle East and we continue to Hear this word resiliency from most big bank execs to describe the US economy.
So we are looking at hedge fund leverage, drawing regulatory scrutiny, but growth is heavily skewed toward trading desks as well as financing.
So if this volatility continues and those funds face margin costs, can traditional dealmaking really carry the load for these banks?
I think they still remain pretty optimistic.
I mean, some volatility is good for trading.
I mean we saw that in the early reporters thus far.
You don't want excessive volatility.
You don't want excessive uncertainty in markets, and what we had from the geopolitical front actually presented a little bit of an opportunity for them.
It was just enough for clients to reposition portfolios.
It was just enough for them to take action.
But it has not been so severe and so protracted that it's actually hurt their businesses.
And when you look at things like investment banking pipelines, most of the big banks remain pretty darn confident.
You heard a little bit of trepidation around things around financial sponsor activity and the potential for deferring some deals, but overall, the tone was pretty optimistic and perhaps much more optimistic than you would have expected, given some of the fear that we've heard in the markets.
And I understand that you're also optimistic about broad-based loan growth as well as consumer health, and we're here at the beginning of Q2 2026 looking at the rate environment not just here in the US but also overseas, but consumer and mid-sized.
Lending only climbed by low single digit percentages last quarter.
So tell us your take when it comes to the consumer, and do you think we should be cautious when it comes to borrowing costs, especially where inflation and energy costs stand right now?
Well, we need to pay attention to the consumer because it's a consumer-driven economy, you know, 70% of the economy comes from the consumer, but most of the banks maintain the consumer is holding up, you know, even in the face of $100 oil.
We heard from JPM and others talking about what percentage of spend goes into things like gas prices, and it's relatively low, so we're not really seeing many cracks, but it's something that I'm spending a lot of time thinking about and watching.
Because the consumer has been stretched, and we've asked a lot of the consumer over the last few years in the face of really steep levels of rate increases, but there were really two big reasons why it's held up better than many people thought.
One, many consumers refinanced their mortgages when rates were low, and that's 75% of consumer debt.
So they're still holding on to that 3 or 4% mortgage, and it really tempered the impact of rate hikes.
And now we're getting On the other side with lower rates, and the second is we threw a ton of money at the consumer both in the form of stimulus payments, deferrals, and Fed balance sheet expansion, you know, to the tune of something like $10 trillion.
So that really served as an effective bridge to the other side of higher rates and got rates lower.
And that's one of the reasons why the consumer has held up thus far.
And if you look at things trying to look for early cracks like credit card delinquencies or something like that, you're not really seeing them trend higher.
So most of the banks still feel pretty darn comfortable there, and they're relatively optimistic about loan growth.
Loan growth has not been that, that strong as you noted, and we are somewhat.
Cautiously optimistic, you know, we think it could slow, and we are in the camp that we're closer to later in the cycle than earlier in the credit cycle and remind people all the time that you can't get away from credit cycles.
So I think, I think the banks are going eyes wide open and they're trying to be cautious, but they're not really seeing cracks in their credit offer.
They're not really seeing cracks in their customer base or the consumer at this point.
So that leads me to my next question, Nathan now that we've heard from the big banks in terms of the latest quarter, what were the key takeaways and were there any surprises for you?
I think the key takeaways is it's almost business as usual, which is kind of like a tale of two cities when you think about what we've seen in the market and what we've seen from a geopolitical standpoint and then balancing that against fundamental performance, you know, coming into the quarter there was a lot of concerns that again that maybe credit was getting long in the tooth and we were finally going to see a turn there.
There were concerns that maybe we wouldn't get the same level of margin expansion. because the, the benefit of the remixing of balance sheets had already sort of played out, and you did have some mixed trends on the margin front.
You didn't see credit though really crack, and you're actually seeing very similar loan growth.
So ultimately the results are pretty good, and something I haven't mentioned is the capital return is looking better for this group coming out of the Basel 3 endgame and lower capital requirements there.
So.
The table's set pretty darn good for a strong fundamental environment heading into this year.
That's very much where we thought we were going to be, but we've had some big macro questions on the geopolitical side and then also lots of concern about private credit.
The banks continue to downplay the risks there.
They continue to maintain that they're very senior in the capital stack on their exposures there, but it has been a big driver of loan growth when you look at financing to non-depository financial institutions.
They still feel comfortable and when you look broadly from a delinquency standpoint, you're not really seeing any real concerns there, but I do think that that will remain a little bit of an overhang on the group and kind of a show me story.
You'll need several quarters to show that there's not problems arising there and that their exposures are that they underwrote them carefully.
So it might be hard for the group to really break out from a stock standpoint.
Until we get more calm on the geopolitical front, more proof on the credit front, but ultimately the fundamentals are good.
And finally, before I let you go, we have about 60 seconds here, so we continue to monitor the geopolitical situation in the Middle East, and we have been seeing wild swings in oil prices.
That's an area all of us will keep our eyes on.
But if commodity markets do eventually stabilize, can banks maintain this level of profitability that we're seeing right now?
It would challenge some of the revenues you've seen from their trading desk because again they want some volatility in periods of great calm.
The fixed income currencies and commodity businesses don't do as well because everybody is staying put with where they are in a position front.
They don't want extraordinary levels of volatility.
So somewhere in between, you know, that Goldilocks scenario of we're not exactly sure where things are going to go, but we're not absolutely terrified.
We're not in full risk off.
So if we do, the ceasefire really does hold, and we do see more clarity in terms of oil prices, and if we do, going into the summit with China, actually get a positive outcome there, which it seems like it could be on the table as well, that would challenge some of their trading businesses, but you probably also get an offset of stronger investment banking activity because that would be more of a risk on scenario and greater appetite, so.
It might be challenging to maintain the higher level of revenue for some of the biggest guys out there, but ultimately I think it'd be pretty darn positive for the group.
A lot of factors to consider, so thank you so much for joining us on this Monday morning as we kick off a new trading week.
Thank you.
