U.S. banks show resiliency while preparing for tough economic climate

[AUDIO LOGO] Let's start off with the results themselves. I mentioned that the results came in. It sounds like a little bit better than expected. The capital markets, I know, were weaker. So maybe just tell me what you're seeing. What are some of the themes that were emerging? Yeah, as you say, the earnings were better than anticipated, about 5% better than consensus estimates so far. And as you alluded to, the capital market side has been weak. If you look at investment banking, revenues down 50% from the same period last year. So that was a big drop-off. But I'd say the positive surprise was around profitability and margins in the consumer, personal, and commercial banking. If you look at the big three banks in the US, net interest income was actually up $10 billion from the same period last year. That's just a huge move. So I think that's been really good, and should also mention that credit, we haven't really seen any cracks there. And the capital ratios have been strengthening. So the banks have been able to get a bid here. All right, well, we'll check in to see if you think that's going to still be the case moving ahead. But let's go back to NIM, Net Interest Margin. Interest rates have gone up a lot in the last six months. Maybe you can just kind of explain. Tell us like we're two years old how that all works and why that can be good for banks. Yeah, this part is really fascinating, especially for me. So if you think back to what happened at the beginning of the year, the theme was all about expenses. JPMorgan comes out of nowhere. They say they've got to spend a whole bunch more money. Can't really tell us when it's going to pay off or how useful it's going to be for them, and so the whole sector went lower. As we moved into the middle of the year, the theme was about capital. And as you say, interest rates really jumped. And so that hurt the US bank capital ratios. And then the stress capital buffer had to go higher as well. So the banks, they had to put a pause on their buyback programs, which investors don't really like. Coming out of Q3, the theme was really around deposits. And this is really, really important right now. Biggest banks in the US, they have twice as many deposits as they do to loans. And so they've been able to show a lot of margin expansion, where some of the other banks that are smaller haven't been able to. And so it's just been a really important theme right now. And the banks are showing their advantage in that way. What about the-- you mentioned about cracks in terms of maybe the capital ratios but also just the credit situation. I mean, if I had a mortgage, and I'm going to renew, my mortgage has more than doubled. And maybe I can't handle anymore-- what that actually means in terms of payments. So how do you see that playing out? Is that overstated? Are you starting to see that show up in some of the US banks? Yeah, so regrettably, we are going to have to talk about this issue at some point, the credit issue. And it'll happen when unemployment rises. That'll be the tell. When that happens, the banks will have to increase their allowances, and earnings will come down. The thing that I'm really trying to figure out is, when will that happen? And then how bad will it be? And my thinking right now is that it's going to happen next year, rather than next quarter. And one of the tells is the fact that loan growth hasn't really decelerated yet. And you can see that in the first chart that I brought along. The loan growth is 10% year over year. And that's still moving higher from the last quarter, which is an important signal. So I'm concerned about credit in the sense that I'm watching it. And it is really important. But at the same time, we need to keep our eyes on that profitability and the deposit trends and the capital ratios. KIM PARLEE: So just looking at the chart that you have here, I mean, you're saying that in the third quarter, US banks' loan growth was-- like it's accelerated-- JAMES HUNTER: It's accelerated. KIM PARLEE: --from the previous quarters. When you start to see that dip, is that something you're going to-- that's a canary in the coal mine, perhaps, for other things? JAMES HUNTER: That's exactly right. KIM PARLEE: Yeah, all right, how are things looking from-- I guess, when-- you've been listening to all the earnings. And I know that you follow very closely JPMorgan, Bank of America, Morgan Stanley. What are the management teams saying? What are they planting now so people are ready for it when it comes? Yeah, well, you know what? They're saying a lot of the same things that they said last quarter, which is that the consumer is really strong and that the job market's really hot. So people are able to pay their mortgages and their credit card bills. And that's a really good thing to see. So there's not a whole lot of different themes from last quarter. They're sticking to that message that credit is really strong today. And I think the other part of it is that credit is going to weaken at some point in the future. Maybe it's next quarter. Maybe it's next year. We have these significant headwinds on the horizon. So we need to continue to be cognizant of that. And it's not clear when exactly it's going to play out. There's a lot of uncertainty right now. And that's what the management teams are telling us. It's interesting, too. You would think they would try and take moves, I guess, structurally to prepare themselves for these things that might be happening. You're not seeing too much of that yet? We're not seeing any evidence of that yet. What about how this could play out? Like are there any trends we're seeing in the States that say, hmm, that's something we could see here coming in Canada, too? Well, one of the things that we could see is an uptick in credit card delinquencies. So that would be another one of the tells around credit. And we're seeing some early signs of that. It depends a little bit about if you segment the population by levels of income, you can see some differences there. But again, it's nothing too concerning. And that would be consistent with what we saw from the Canadian banks in their Q3 results a couple of weeks ago. [AUDIO LOGO]

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