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Filippo Alloatti: US money-center Q2 review

Home / Credit / Filippo Alloatti: US money-center Q2 review

Filippo Alloatti, Senior Credit Analyst
20 July 2015
Credit

With the majority of the US money-center banks having reported for 2Q15, Filippo Alloatti, Senior Analyst at Hermes Credit, shared his initial thoughts on this set of numbers.

In general, this good quarter is one more step along the recovery path for banks who are rebuilding equity and mainlining conservative balance sheets. We take some comfort in this. Indeed, we have not seen credit spreads weaken on supply concerns because the confidence gained from improving credit quality eclipses fear of supply, as shown by stable-to-improving credit spreads.

In general, Net Interest Margins (NIM) are stabilising; loan growth remains steady (if pedestrian); traditional fees are rebounding from a soft 1Q; capital markets revenues were down slightly; and cost efforts are bearing fruit.

As banks anticipate their total loss-absorbing capacity targets, issuance is picking up pace. The negative impact in the market of an expected surge in issuance is broadly offset by solid fundamental performance.

Asset quality indicators are incrementally improving as part of the continuation of an industry-wide trend: consumer delinquencies, non-performing assets and charge-offs are all down sequentially at the large banks.

Large US banks remain asset sensitive. A 100-bp parallel shift higher in the curve would generate $3.9bn in additional Net Interest Income (NII) over the next 12 months at Bank of America and some $2bn at Citi. Some banks, including Citi, are moving to a more offensive posture, seeking acquisitions in selected business areas such as cards.

10-year Treasury, five and two year rates having being up in the quarter benefit virtually all banks in the form of higher reinvestment rates on securities, alleviating some NIM pressure. Of the money center-banks, Bank of America benefited the most this quarter.

The Fed’s data on US banks (H.8) released in July shows loan growth in line with recent periods. Commercial and Industrial (C&I) continues to drive growth followed by Commercial Real Estate and cards, offset by continued declines in home equity (-6.4%). This is notwithstanding a tightening of lending criteria in the most recent Fed senior loan officer surveys.

Bank of America’s 2Q15 results comfortably beat the Street’s expectations. A court ruling allowed Bank of America to reject nearly $7bn of mortgage repurchase requests and release reserves.

Citi results were strong from a bondholder perspective, with net income (ex. CVA/DVA) of $4.7bn beating consensus expectations. Citi's capital and leverage metrics strengthened further as RWAs fell. We recall the Citi 1Q15 results which set a key milestone, as the ROA topped 1% for the first time since 2007.

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Filippo Alloatti Senior Credit Analyst Filippo joined Hermes in 2011 as a senior credit analyst on the Hermes Credit team and specialises in European and US financials. Prior to this he served in a similar capacity at Fortis Investments in the global credit and hybrids group and subsequently at BNP Paribas Asset Management in Paris. Other roles at Fortis included securitisation analyst and regulated utilities and property analyst. Filippo began his career in Germany at Sal Oppenheim & Cie and Berenberg Bank, where he was responsible for derivatives trading and M&A financing. Filippo holds a Bachelor’s degree in Economics & Business Administration from the Universita’ La Sapienza in Rome.
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