Macro

Wall Street Banks to Borrow $21-$24 Billion Post-Earnings, Surpassing July Average

Big Six U.S. banks to borrow $21-$24 billion in July, surpassing historical average of $17 billion.

By Max Weldon

7/11, 10:40 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Bank of America Corporation
Citigroup, Inc.
Goldman Sachs Group, Inc.
JP Morgan Chase & Co.
Morgan Stanley
Wells Fargo & Company
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Key Takeaway

  • Wall Street's six biggest banks are expected to borrow $21-$24 billion post-Q2 earnings, surpassing the historical July average of $17 billion.
  • Barclays forecasts $30 billion in Q3 borrowing, driven by Bank of America and Goldman Sachs, each predicted to issue $15 billion.
  • Favorable borrowing conditions due to cooler June inflation and anticipated Fed rate cuts are likely to meet strong investor demand.

Banks Set to Borrow More

Wall Street's largest banks are gearing up to borrow significantly more than usual following their second-quarter earnings reports. According to JPMorgan Chase & Co. credit analyst Kabir Caprihan, the six biggest U.S. banks could borrow between $21 billion and $24 billion, surpassing the historical July average of approximately $17 billion. Caprihan noted, "July is on average the third heaviest month for global systemically important banks issuance after January and April and we don’t expect that to change in 2024."

JPMorgan, Citigroup Inc., and Wells Fargo & Co. will kick off earnings on Friday, followed by Goldman Sachs Group Inc. on Monday, and Bank of America Corp. and Morgan Stanley on Tuesday. Analysts predict a second consecutive quarter of declining net interest income, the difference between what banks earn on their assets and what they pay on debts, after a record surge last year.

Barclays analysts, including Peter Troisi, estimate that these six banks face about $50 billion in redemption calls and maturities in the second half of 2024. They expect these bonds to be fully replaced with new senior debt, predicting the "Big Six" could borrow around $30 billion in the third quarter, with most of it issued this month. Bank of America and Goldman Sachs, having been the least active this year, are expected to be significant issuers in the second half, with Barclays forecasting $15 billion each from these banks.

Favorable Borrowing Conditions

The backdrop for selling bonds is favorable, following cooler-than-expected inflation in June, which has fueled hopes that the Federal Reserve might begin lowering interest rates this year. A perceived gauge of risk in the high-yield credit market eased to its lowest level since March following the inflation report. Big lenders are also preparing for new capital rules that might require them to hold more debt at the holding-company level. Fed Chair Jerome Powell indicated that the Federal Reserve is close to detailing a revamped plan for these rules, known as Basel III Endgame.

Bloomberg Intelligence analyst Arnold Kakuda expects big-bank bond issuance to rise partly due to these anticipated rules. He forecasts issuance of $20 billion to $25 billion this month. "Post-pandemic, the lenders have much bigger assets and larger debt footprints," said Kakuda. "To keep their debt footprint, they will naturally be bigger issuers."

Strong Demand for Bank Debt

The banks' borrowing spree is likely to be met with strong demand from investors flush with cash, including foreign firms and U.S. pension plans. Bank bond spreads have rallied this year despite record corporate issuance in the first half, thanks in part to subdued issuance from some of the big lenders. Banks have also been issuing more bank-level debt in recent months as deposits receded from their pandemic-era highs, helping keep a tight lid on the sector’s spreads. The average spread on a financial institution bond ended Wednesday at 93 basis points, just 3 basis points wider than the broader high-grade index, according to Bloomberg index data. That spread was 13 basis points wider at the start of the year.

Voya Investment Management is one of the investors interested in purchasing bank debt. Samuel Wilson, portfolio manager at the firm, stated, "We have recently reduced the larger banks in anticipation of supply and because spreads are generally full in the broader investment-grade market. So that gives us room to add, especially if we see some underperformance or broader spread widening."

Street Views

  • Kabir Caprihan, JPMorgan Chase & Co. (Neutral on global systemically important banks issuance):

    "July is on average the third heaviest month for global systemically important banks issuance after January and April and we don’t expect that to change in 2024."

  • Peter Troisi, Barclays (Neutral on Big Six bank borrowing):

    "The 'Big Six' could borrow about $30 billion in the third quarter, most of which would be issued this month."

  • Arnold Kakuda, Bloomberg Intelligence (Bullish on big-bank bond issuance):

    "Post-pandemic, the lenders have much bigger assets and larger debt footprints. To keep their debt footprint, they will naturally be bigger issuers."

  • Samuel Wilson, Voya Investment Management (Cautiously Optimistic on purchasing bank debt):

    "We have recently reduced the larger banks in anticipation of supply and because spreads are generally full in the broader investment-grade market... So that gives us room to add, especially if we see some underperformance or broader spread widening."