The earnings season is upon us, and it’s a big deal. Especially now, when markets are trying to navigate the risk of a recession…

Analysts pay attention to each report and look for signs of what could come next.

Vital financial metrics show the performance of each public company and provide essential data on the health of the economy.

Knowing if sales are falling or growing has never been so important. Are we still headed into a recession, or did we already reach the bottom and should expect growth ahead?

This earnings season, analysts pay special attention to one sector that started to show signs of weakness — financials.

Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse have dominated the headlines recently. Two of them went bust, and one was rescued.

That’s far from normal, and markets are watching if any other financial institutions will follow suit.

Small Traditional Banks See Deposit Outflows

Quarterly earnings results indicate that funds flow from small regional banks to large-cap banks.

Customers are moving their capital to the biggest players. That’s a typical “flight to safety” move during times of high volatility.

But major banks that can’t provide high-interest savings products are also bleeding cash. Three major financial groups (Charles Schwab, State Street, and M&T) recorded almost $60 billion in funds outflows in the last quarter.

That’s dangerous…

Some banks also increase loan-loss reserves and cancel share buybacks. In other words, they are shoring up their balance sheets to prepare for the potential tough times ahead.

Investors noticed that and shifted away from bank stocks. As a result, the KBW Bank Index, which tracks 22 major banks, fell over 20% since the beginning of the year. At the same time, S&P 500 gained over 5%.

To understand the reason behind the sell-off, we need to realize that banks mostly use borrowed money for lending.

When interest rates rise, making money becomes a challenge. And when interest rates are growing at the highest pace in decades, banks’ bottom lines are under pressure.

Anyone who secured fixed-rate mortgages below 3% over the last couple of years is a big headache for banks now. These mortgages aren’t paying the banks enough to offset higher deposit costs.

And big tech companies see an opportunity here.

The Era of Big (Fin)Tech Has Begun

Earlier this month, Apple (along with Goldman Sachs) announced a savings account that pays a 4.15% annual yield.

A tech giant such as Apple can afford to offer this kind of product. At the end of 2022, it had $165 billion in cash and marketable securities and $111 billion in debt. It has a positive net cash position of tens of billions of dollars.

While most banks’ capital consists of about 90% borrowed money, Apple can provide financial services with less leverage. On top of that, the company has a massive customer base that is already familiar with Apple’s bank-like services, such as Apple Pay. There are about 1.5 billion iPhone users in the world.

The company’s financial products are part of a well-integrated ecosystem, which is one of Apple’s strengths. And Apple sells premium products, which tells us that its customer base is more financially strong than average.

In other words, Apple is well-positioned to become a financial service provider to its well-off customers.

Other big tech players such as Alphabet (Google’s parent), Microsoft, and others could join the “banking game.”

Even if Apple loses money on its financial products temporarily, it won’t go out of business. Its core hardware and software business will keep the company afloat. Traditional banks are under much more pressure to survive.

Apple will report its quarter-end results on May 4th, and investors should pay attention to them.

Analysts will look for more details on the financial side of the business and further expansion plans.

The tech giant may come to dominate consumer lending in the years to come. This is a story that you can’t afford to miss.

Thank you for your loyal readership,

The Financial Star team