Wall Street Looks at Big Bank Earnings, but Regional Banks Tell the Story

Goldman Sachs grabbed headlines in the first half of this week with better-than-expected earnings due to their investment banking focus. While JP Morgan underperformed, other large banks strengthened the sector as earnings came in.

But the real story of the state of the United States banking industry likely will be told as regional bank earnings come out.

Analysts believe that some of the smaller U.S. banks have too much exposure to commercial real estate, where there is little appetite to restore the five-day in-office work week, and stubborn interest rates put even more pressure on owners. The market has yet to show its full impact post-pandemic, but already in major cities attempts to transition buildings into housing units are a sign of things to come.

A second concern is industry deposits, and the 2023 mini-crisis in the beginning of the year may repeat itself before the end of 2024.

Community bank stocks have fallen by more than 13% this year on average with New York Community Bancorp leading the decline by 70% with major concerns over uninsured deposits. Consumers may flock to larger banks if there is another run like 2023. The United States banking market is very different than its counterparts in Europe and Asia in that regional banks are still a significant percentage of small business and consumer deposits.

The 10-year Treasury note yield is also a concern, with Treasuries increased to 4.6% this week. Higher treasury yields can mean greater stress on borrowers and lenders.