U.S. Banks Second Quarter Earnings Wrap-Up

After a multi-year slump, it looks like larger U.S. banks may have finally turned the corner. According to a July 24th report from Credit Suisse Group AG (ADR) (NYSE:CS) Equity Research, both U.S. large and mid cap banks have reported in line to slightly above consensus second quarter 2015 earnings.

In the report, research analyst Susan Roth Katzke and colleagues note that “Earnings for the Large and Mid cap banks were generally better than forecast—largely expense and credit driven, with a seasonal rebound in revenues that was more evident at the Mid Caps. Generally speaking, we raised 2015 EPS estimates although left 2016/17 estimates unchanged as drivers of earnings upside this quarter are not necessarily sustainable in our view (mortgage banking revs, lower loss rates, less reserve release).”

Break down of large and mid cap U.S. banks second quarter earnings

The CS report highlights that larger U.S. banks second quarter results saw unexpected benefits from active balance sheet management, strong mortgage banking results, excellent cost control and lower than forecast credit expenses.

Katzke et al. also pointed out that while capital markets results for the sector were not stellar, they were generally speaking, “no worse than anticipated.”

Exhibit 1 and Exhibit 2 illustrate the fact that mid cap banks’ quarter over quarter EPS growth of 5% was just a bit faster than that of the large cap U.S. banks at 4%, and that mid cap banks saw a rebound quarter over quarter from a seasonally weak first quarter with an extra day in the quarter helping NII, robust deposit service fees and well above expectation mortgage banking results.

That said, revenue growth was weak at large cap banks, flat both year over year and quarter over quarter. Revenues moved up a bit at 3% quarter over quarter at the mid cap banks and also were up 3% year over year.

Looking ahead for larger-cap banking sector

Katzke and colleagues also highlight on the positive side that the second quarter saw an increase in active balance sheet management, including hints of stabilization in NIMs, better than anticipated mortgage banking results (with solid third quarter pipeline), good expense control and below-forecast credit costs The CS analysts note the low credit costs developed despite some analyst concerns about energy exposure.

On the negative side, they noted that “capital markets results were a lowlight but no worse than anticipated.”

Also of note, loan growth decelerated a bit across the board in both quarter over quarter and year over year results.

Exhibit 7 and Exhibit 8 illustrate Credit Suisse’s forecasts both going into and after second quarter results, and also provide an extrapolation of their full year forecasts for both 2015 and 2016. Of note, revenue growth was generally above consensus projections. This was “partly NII driven as NIMs held up better than forecast, and partly fees.”

You can also see from the exhibits that preprovision profits also generally ran a good bit higher than forecast in the second quarter, and notably to a larger degree in the mid cap bank sector.