What happened
Bank stocks ripped higher this week as second-quarter earnings reports began to come out, giving investors a sigh of relief and allowing them to buy the group from low valuations.
Shares of the large brokerage Charles Schwab (SCHW 0.13%) traded roughly 15.4% higher for the week as of 12:45 p.m. ET Thursday, according to data from S&P Global Market Intelligence. Meanwhile, shares of KeyCorp (KEY 0.62%) also traded more than 16.2% higher, while shares of Citizens Financial Group (CFG 0.43%) were up nearly 11%.
What happened
Earlier this week, Schwab reported adjusted earnings per share of $0.75 on total revenue of roughly $4.66 billion, both numbers beating consensus estimates.
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While the company continued to report weaker results, the big positive is that client cash sorting (i.e., when clients move excess cash from their brokerage accounts to higher-yielding bank products) seems to be slowing. Bank deposits at the end of the second quarter totaled roughly $304 billion, down from nearly $326 billion at the end of the first quarter. However, that's certainly a much smaller decline from previous quarters.
"While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months," Schwab's CFO Peter Crawford said in an earnings statement. "The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet."
KeyCorp also reported second-quarter earnings Thursday morning, delivering earnings per share of $0.27 on total revenue of $1.6 billion, both numbers missing consensus estimates.
The bank continued to struggle as deposit costs continued to rise faster than asset yields, hurting the bank's net interest income (NII, i.e., the money banks make on loans and securities after funding those assets). NII fell by nearly 11% from the first quarter, and KeyCorp also saw its margin contract by 35 basis points (0.35%). Management expects NII to fall 4% to 6% in the third quarter and then be from flat to down 2% in the fourth quarter. The company's projected loan loss rate is also expected to rise in Q3.
Citizens Financial Group reported earnings of $1.04 on total revenue of roughly $2.09 billion. Earnings beat estimates, while revenue missed slightly.
Citizens is dealing with much of the same issues as most super-regional banks, and the bank saw NII and its margin come down in the second quarter. Still, the bank actually managed to grow deposits in the quarter as the bank saw deposits decline in the first quarter due to seasonal factors and higher interest rates. Citizens also managed to pay down $6.8 billion of high-cost borrowings in Q2.
Now what
Ultimately, bank stocks benefited this week from a more positive economic outlook and no major surprises in the earnings reports, allowing investors to buy up bank stocks from valuations I thought were too low.
I think all three of these banks will likely be able to navigate the challenging near-term outlook, but of this group, I like Citizens the best. The bank performed admirably in the quarter, has strong capital levels, and has been doing a nice job of building out diversified business lines.
