Weekly Review & Outlook: May 1, 2023  

By Scott Hallermann.

Starting with the good news, historical returns suggest an 89% chance of +5.62% or greater BANK index
return in May. Since 1998 the BANK index experienced 9 periods of substantial 3-month declines similar to
the current period. The following month’s BANK index return in 8 of those periods
averaged 9.19%. With the index 13% below the 50-day moving average, a reasonable case can be made that we should experience a relief rally to test moving average resistance.

1Q23 bank quarterly results are now mostly released. Trends deteriorated modestly last week as smaller
banks as a group experienced greater Net Interest Income contraction from higher liquidity balances, more
slowly adjusting asset yields and lower expense leverage. My final tally shows 52% of banks with greater than $10B in assets missed consensus EPS expectations by a median -1%. Median EPS was -9.3% below the December quarter while 12.8% higher from the year ago linked quarter. Loan loss provision was down about -10% from December along with declining Non-performing Asset ratios. Net loans increased 1.3% in the quarter and tangible book value rose a median 4.8%.

Overall despite declining net income and concerns about the Fed induced economic slowdown, results are a far cry from the doom found in March headlines proclaiming system wide insolvency. The large majority of
banks understand job 1 is through cycle franchise preservation. This translates into capital retention,
increased underwriting standards and trading lower near term earnings for higher liquidity.

Which brings me to thoughts on Wednesday’s FOMC meeting. My guess is that the CME FedWatch tool and T-bill market are correct, and we get another 1⁄4 point hike. At that point we probably are at the terminal rate. Whether implementation statement or press conference language spells that out is uncertain.

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