KBW CEO Michaud Discusses Q3 Bank Earnings Pressure

Keefe, Bruyette & Woods (KBW) CEO Tom Michaud states that banks remain under pressure until the rate outlook stabilizes. Since July 15, bank stocks have declined by 10 percentage points in relative performance ahead of the third-quarter (Q3) earnings season. Michaud attributes the selloff to rate nerves rather than weakening fundamentals, with major bank earnings starting next week. The 10-year Treasury yield reached approximately 5.35%, the highest since 2002, coinciding with earnings reports from JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo on October 13. KBW utilized artificial intelligence to analyze second-quarter earnings, revealing mentions of net interest margin were 60% above the three-year average. A regression analysis indicated that changes in this margin closely correlate with bank stock performance. Michaud believes concerns over rates are exaggerated. Insider buying in financials has decreased, nearing a 23-year low. He anticipates a 10% year-over-year increase in Q3 investment banking profits, supported by a private equity backlog. Michaud also noted renewed concerns about bond markets and interest rates, with unrealized bond losses at 19% of industry tangible capital in 2023, up from 5% last quarter. These losses may hinder buybacks at some banks, while larger banks have already optimized capital. KBW projects tangible common equity to reach near 10% by 2028, compared to 6.5% before the financial crisis. Michaud foresees potential one-off credit issues after years of low credit costs, questioning whether they could become systemic.

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