How the war in the Middle East could affect big banks' earnings

Big banks in the U.S. will be reporting earnings in the coming days. Goldman Sachs kicked things off on Monday morning, reporting that profits rose nearly 20% in the first quarter compared to the same time a year ago.

That was thanks in part to revenue it earned advising companies on mergers, acquisitions, and other kinds of corporate deals, of which there have been many over the last year. But there are also likely to be signs this week that the war in the Middle East is starting to affect bank earnings.

There are a few ways that the war can actually boost profits at big banks.

For one, they do a lot of stock trading on behalf of their clients. And over the past month, stock markets have been volatile.

“Increased volatility is oftentimes very favorable for trading results,” said Gerard Cassidy, a managing director and bank analyst with RBC Capital Markets.

He said banks earn fees when they execute trades for their clients.

“And because of increased volatility, clients of these companies trade more frequently,” Cassidy said.

The effect that the war is having on energy prices is also boosting revenue for energy companies. Nate Tobik, CEO of CompleteBankData, said that can also help the banks that lend to the energy sector.

“Some of these companies are going to say, ‘Hey, we finally have a need to do some of these bigger capital projects, to expand,’” he said. “And that’s going to be increased loan volume for really any banks that have that energy exposure.”

But Tobik said there are plenty of companies that are being harmed by the war — either because they’re directly exposed to conflict, or because they’re just less confident.

Stephen Biggar, bank analyst and director of financial services research with Argus Research, said banks could see revenue slow in the near future because many companies might hold off on mergers and acquisitions or IPOs.

“It’s just a pause in activity until you get some clarity on the global ramifications of these conflicts,” he said.

Banks are also concerned about the effect that the war is having on the U.S. economy, said David Schiff, senior managing director with FTI Consulting.

“If prices continue to stay high, and inflation stays at an elevated level, particularly around fuel and energy costs, that starts to have a ripple effect across consumers, which then has an impact on small businesses,” he said.

Schiff said that means banks will start to worry about their borrowers.

“(As a result,) on the one hand you see credit card standards tighten,” he said. “On the other, you start to see provisions start to increase for potential losses.”

All of that, Schiff said, will limit how much the economy can grow.

“Some of that is businesses themselves not wanting to grow, and then it gets magnified as financial institutions pull back on credit lending,” he said. “So it really raises that specter, the longer this goes on.”

If the war does drag on, Schiff said we’ll likely see evidence that banks are pulling back in the next two to three quarters.