JPMorgan opened up earnings season for big bank stocks, reporting an all-around earnings beat alongside surging profits. But are positive earnings calls enough to signal banks are in the "all clear" after financial shakeups in regional banks earlier this year? Nathan Stovall, S&P Global Market Intelligence Director on Financial Institutions Research, and CFRA Research Director of Equity Research Ken Leon join Yahoo Finance Live to review the outlook for other big banks, taking into consideration the health of the U.S. consumer and pushes for tighter capital requirements by regulators.

This post was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: Well, the results from the big banks kicked off a closely-watched earnings season.

JP Morgan coming out strong in the second quarter, thanks in part to higher interest rates.

Profit of the bank jumping 67% lifted by, as well, the company's acquisition of the failed First Republic Bank in early May.

CEO Jamie Dimon touted the strength of the consumer on the earnings call this morning but warning there are still substantial headwinds.

JAMIE DIMON: The consumer's in good shape.

They're spending that excess cash.

That's it-- that's all tailwinds.

Even if we go to recession, we're going with rather good condition with low borrowings and good house price value still, but the headwinds are substantial and somewhat unprecedented.

This war in Ukraine, oil, gas, quantitative tightening, unprecedented fiscal needs of governments, QT which we've never experienced before.

And I just think people should take a deep breath in that.

And though we don't know where those things are going to put us in a soft landing, a mild recession, or a hard recession.

JULIE HYMAN: For more on this, let's bring in Nathan Stovall, S&P Global Market director and-- director of Financial Institutions Research and Ken Leon, CFRA Research director of Equity Research.

Good to see you guys.

Thank you both for being here.

Nathan, let's start with you here.

As we look at the banks here, it feels like they're navigating-- it's not like this environment right now is unquestionably good for banks.

And yet, they seem to be navigating it pretty well here.

Is that how you would assess it?

And how do you think they're doing so?

NATHAN STOVALL: I think the prints this morning were really strong.

I mean, there were two real big issues we were looking at coming into this around liquidity and specifically around the cost of deposits and the stability of deposits and then credit.

And on both fronts, the big banks look pretty good here.

But I don't know if we can provide a clear readthrough to the rest of the group.

Notwithstanding for the reasons that Jamie mentioned earlier, it's still a little bit early.

We-- I agree with a lot of the things that he said.

The consumer is strong.

We feel like we are headed towards normalization rather than sort of a severe downturn.

But the other, I would point out, is that the big banks seem to have benefited from inflows of deposits from smaller institutions, particularly the regional banks.

So while these numbers are good, and they've definitely beat expectations on a lot of those metrics, whether it's credit cost or margins and the cost of deposits, I don't know if we can sort of blow an all clear here and provide a readthrough to the rest of the group quite yet.

BRAD SMITH: Ken, what do you think?

Are we able to call any type of all clear?

Or is there still more that needs to be uncovered?

KEN LEON: Well, it's great to be here and also with a former colleague, Nathan.

So the second quarter is an inflection point.

We're not firing on all cylinders.

The economy is resilient both for consumer and commercial lending.

The spreads between deposit costs and the earnings yields, they're probably going to narrow.

But if the economy remains healthy, we will see loan volume growth.

We also are at the inflection point, maybe the trough of the investment banking cycle.

So for the big six which are diversified banks, we're likely to see a pickup in investment banking phase.

Trading is what it is.

There's volatility that helps.

And I think the intention for next year for analysts is going to focus on two things.

One would be is there a decline in net interest income, particularly if rates flatten or go down, and second, the big issue is return of capital off of Michael Barr's speech, the vice-chair of the Fed on a holistic capital structure.

It means more regulated capital needed.

That's the big deal for investors.

JULIE HYMAN: It is a big deal for investors, Nathan.

But given, again, the sort of resilience of the banks here, how big of a deal?

I mean, particularly for JP Morgan, right?

If you see these additional capital requirements coming through, how big of a hit is that really going to be for the bottom line and for the stock price?

NATHAN STOVALL: Well, I think Jamie tried to speak to that earlier and basically say that they'll pivot.

They'll find ways to adjust to a higher capital regime.

And that's what we've heard from most of the banking industry.

And there are some institutions that would come up short if you'll get the group that is above $100 billion in assets in terms of capital levels and where they could go.

But I do think it is manageable.

And then, Ken's point around capital return, that is something that we're waiting for.

And I think everybody's kind of in this wait-and-see mode, both from where the regulatory environment is going to go as well as where the credit environment is going to go.

And it's a little bit early to say.

But I think it is something that they absolutely could adjust to and where these things are being traded right now in price right now, they're not necessarily being priced off of current earnings.

I mean, there's still a lot of doubt priced into these stocks, particularly the regional names.

So I think that they can adjust to it.

And if the results are better than people expect, then I'm not so sure he's had a huge of a story for them.

BRAD SMITH: Nathan, what did you make of the way that some of the CEOs and leadership at the banks right now are talking about the consumer and how they're evaluating where balance sheets for households are as well as some of their spending patterns?

NATHAN STOVALL: One, if you look at the consumer remains really strong.

Unemployment is still really low.

Household debt to income is still near a 40-year low, about 1 and 1/2 percentage points below the 40-year average.

And while we've seen savings rates come down, and we've seen excess savings that were accumulated during the pandemic come down, we're still sitting on some.

We've seen card delinquencies come up, but they're still below pre-pandemic levels.

So we're still seeing lots of health in the consumer.

And I happen to agree with them right now that it doesn't necessarily match some of the fears in the marketplace.

Now it's still early.

We're only a year plus into this higher-rate regime.

You could really even say six months into, really, a land of higher rates.

And it takes a while for that to be processed.

So I think the jury is a little bit still out.

But the consumer does remain strong and is showing quite a bit of resilience here.

JULIE HYMAN: And we're still also really, really early in the earnings season, right?

Yes, we've gotten these three big banks today, but there are a lot more to come.

So Ken, when you look at what we have heard, what can you extrapolate to the rest of the banks, particularly, say, the regionals?

And are there any that you're specifically worried about?

KEN LEON: Yeah, so as we go downstream in size, there's the super regionals which were still very positive like PNC.

But then as you get into mid-sized banks, below $100 billion, areas that matter is just the traditional lending and whether they're able to drive still higher net-interest income.

Commercial real estate picks up as a risk as you go to the smaller banks as well simply because they're not diversified.

They also don't have the ability to generate the excess funds that the largest banks can do who are gaining market share out there in consumer banking and perhaps middle markets and small business.

So it's tough game for small banks they need to consolidate.

JULIE HYMAN: And then, in a different kind of bank, I want to bring up Goldman Sachs with you, Ken, because you just downgraded it from strong buy to neutral, I believe.

KEN LEON: Sure.

JULIE HYMAN: So what's the deal there?

Goldman-- there's been a lot of noise around Goldman lately.

KEN LEON: That's right.

So we actually-- during the bank crisis, if you will, in March-- upgraded it from hold to strong buy.

A little bit too early on this inflection point of the investment banking cycle.

But Goldman has other issues as well.

And they're also indicating that the second quarter might be throw the kitchen sink in with large write-offs of some of these non-core businesses.

It's also body language from David Solomon, whether he can show that the strategy they have is going to work.

They will gain wallet share in the core business.

There's no question about that.

But they missed valuable time in the last few years as other competitors have really gained a size and spend market share in investment and wealth management.

So it's going to be a tough issue for David Solomon and the financial media.

And investors are all over that next Wednesday.

JULIE HYMAN: Yes, we will be.

Thanks so much, guys.

Good to see you.

Nathan Stovall, S&P Global Market director of Financial Institutions Research, and Ken Leon, CFRA Research director of Equity Research.

Thanks to you both.