Bank Provisions Rise as Trading Records Lift Wall Street Profits

Two Stories in One Quarter

The second quarter showed the U.S. banking industry moving in two directions at once. Loss provisions jumped across the system and trimmed aggregate profits. Meanwhile, the biggest Wall Street firms posted trading results that beat what analysts had expected. A third development may matter more over time: regulators are proposing to loosen the capital rules that govern how much cushion banks must hold.

Provisions Climb, but the Cause Is Narrow

The FDIC reported that industry net income fell $677.3 million from the first quarter, which left return on assets at 1.13 percent.2 Higher provision expense drove the decline. Provisions rose $7.6 billion, or 33.7 percent, to $30 billion for the quarter.2

The headline number overstates the trouble. The FDIC attributed the increase mainly to provisioning tied to a single large bank acquisition, and said industry net income would have risen without it.2 That distinction matters. When provisions jump because lenders expect borrowers to default, it signals stress. When they jump because an acquirer must book reserves against a portfolio it just bought, it is largely an accounting event.

Other FDIC data supports the second reading. The ratio of credit-loss allowances to noncurrent loans rose slightly, from 177.6 percent to 179.4 percent, and stays well above its pre-pandemic average.2 Reserves are growing a little faster than problem loans, which suggests banks are cautious rather than catching up on losses.

Consumers Are Not Flashing Red

TransUnion's consumer credit data points the same way. Originations rose in the second quarter across credit cards, unsecured personal loans, mortgages and auto loans.3 Balance growth on cards and personal loans stayed controlled, and delinquencies fell.3

The 90-day-plus borrower delinquency rate on credit cards dropped to 2.17 percent, its second straight quarterly decline. Charge-off trends on cards also improved.3 Total card balances reached $1.09 trillion.3 Personal loan balances hit a record, and the subprime segment led a modest drop in delinquencies.3

TransUnion said economic pressure is still pushing many households to borrow for everyday expenses. Even so, it found most consumers are managing debt responsibly, which creates lower-risk opportunities for lenders.3 This fits the FDIC's picture. The rise in provisions does not appear to reflect a broad decline in borrower health.

The Trading Windfall

The large dealer banks had a much better quarter. According to CNBC, combined results beat a $39 billion trading estimate.4 Goldman Sachs' equities desk set a record of $7.42 billion against roughly $5.05 billion expected.4 JPMorgan's equities trading rose 86 percent to $6 billion. Morgan Stanley's equities revenue reached $6.3 billion, about $1.9 billion above consensus.4

The earnings surprises were large. Goldman reported $20.98 per share against $14.48 expected, and JPMorgan reported $7.70.4 Analysts at KBW, Barclays, Wells Fargo and other firms raised their price targets, including $1,200 for Goldman and $420 for JPMorgan.4 CNBC noted that analysts' estimate revisions are now trailing actual results.4 Goldman's management also pointed to its largest advisory backlog in five years as evidence that the strength will last beyond one quarter.4

Regulators Ease the Capital Burden

The regulatory outlook is also turning in banks' favor. The Federal Reserve, FDIC and OCC have jointly proposed replacing the contentious 2023 Basel III Endgame plan with a less demanding framework.1 The agencies estimate it would free up $87.7 billion in common equity tier 1 capital across the system.1

The relief would vary by bank size:

• Global systemically important banks: about 4.8 percent less CET1.1
• Large regional banks: about 5.2 percent less.1
• Smaller institutions: about 7.8 percent less.1

For the largest banks, the revised Basel proposal alone would actually raise requirements by 1.4 percent. A separate change to the G-SIB surcharge, worth a 3.8 percent reduction, more than cancels that out.1 The plan did not have unanimous support. Fed Governor Michael Barr dissented.1

What It Adds Up To

Taken together, the data does not show an industry under pressure. The provision spike came mostly from one deal, and consumer credit and reserve coverage both look stable. The trading results show how much the largest firms benefit from market volatility and heavy client activity.

The open question is how banks use their advantages. Strong earnings plus nearly $88 billion in potential capital relief give them more room for buybacks, lending or new risk. Barr's dissent is a reminder that the relief is being granted during good times. Whether the smaller cushions prove adequate will only be clear in a downturn, which this quarter's numbers do not show coming.