Banks Expected to Report Earnings Decline

JPMorgan (JMP), Wells Fargo (WFC) and Citigroup (C) are expected to report second-quarter earnings on Friday, 12 July, kicking off the unofficial earnings season. 

The major US banks are expected to provide updates on their outlook for interest income, given expectations of Fed rate cuts in the coming months. The prospect of lower interest rates may have recently boosted risk appetite and pushed stocks to record highs, with traders pricing in a 75% chance of a cut in September.

Still, analysts predict earnings in Q2 will decline for most banks compared to a year prior due to lower net interest income (NII) and higher provisions due to risks to commercial and industrial (C&I) loans and commercial real estate loans. The Fed's last stress tests showed C&I loss rates are projected to rise compared to last year. Let’s take a closer look.

Analysts Warn of Declining Earnings

The financial sector is expected to report the lowest year-over-year (YOY) earnings growth of 4.3% for the second quarter compared to other sectors, led by the banking industry, which is projected to report a 10% earnings decline.

Analysts predict banks may have to borrow more money to cover potential losses. Banks have around $517 billion in unrealised losses on their balance sheets, mainly due to lower bonds as interest rates remain high. However, unrealised losses are expected to remain flat this quarter. 

Credit quality also remains a headwind, particularly in commercial real estate and credit cards, though the impact may be less severe than some reports suggest.

While investment banking divisions may benefit from higher deal-making activity, NII will likely remain under pressure as interest rates remain high, constrained by slow loan growth. However, net interest margins remain low, with some banks guiding future increases.

Noninterest revenues are expected to be mixed, with investment banking revenues restrained by weak M&A activity likely offset by mortgage banking and wealth management revenues, which may benefit from higher origination activity and stock market gains.

Although signs of weakness are emerging in consumer finances, commercial real estate and net interest margins, regional, not major, banks remain the weakest part of the system. Still, major banks are not out of the woods just yet.

JPM, Citi and Wells Fargo Brace for Q2 Impact

Lower interest rates and rising loan losses are expected to negatively impact the three banks' profits. However, Citigroup is expected to benefit from increasing investment banking fees and deal-making activity, though this may only partially offset the impact of lower interest income.

JPM Sees EPS Decline, Hangs on NII

JPM is expected to see a decline in Earnings Per Share (EPS) to $4.19 from $4.75 in the year prior, with total income predicted to fall by a marginal 1% to $42.5 billion. NII, which generates around 60% of JPMorgan's revenue which benefitted last year from the acquisition of First Republic Bank (FRB), is expected to drive Q2 results again. Revenues are forecast to remain around $165.8 billion for the full year 2024, with NII in 2024 up by around 2.5%.

Wells Fargo Revenue Dip Offset from Rate Spreads?

Wells Fargo is forecasted to see an uplift in net EPS to $1.29 from $1.25 in the prior year. Despite a slight reduction in total revenue to $20.3 billion, the bank is projected to have profited from broader interest rate spreads applied to retail client accounts as demand for loans remained solid for the bank. However, investors may feel a sense of unease with respect to increasing ratios of non-performing commercial loans, which could undermine growth if not addressed properly.

Citi Poised for Profitability Boost Due to M&A

Citigroup is expected to see increased profitability, with earnings projected to increase to $1.29 per share on the back of higher anticipated revenues of $20.1 billion. The uplift in Mergers and Acquisitions (M&A) activity compared to the weaker opening months of the year is seen as providing a modest boost for the transnational banking institution. Analysts have been gradually upgrading their forecasts for the company over the course of the quarter as well, helping its stock price outperform sector peers, including JPM and WFC, with the strongest gains over the previous 3-month period. However, this could expose Citi to underwhelming investor sentiment should it fail to meet high expectations. (Source: Yahoo Finance)

Conclusion

As JPMorgan, Wells Fargo and Citi gear up to announce their Q2 earnings on Friday, 12 July, market participants may seek insights into their performance and outlook in the face of looming Fed rate cuts. Analysts expect challenges to arise due to lower net interest income and increased provisions for potential loan losses, with banks projected to see a 10% decline in earnings.

While investment banking activities might provide a silver lining, NII may continue to feel the pressure of high interest rates and rising loan losses on their bottom line. The three major US banks are each poised to steer these challenges differently, with Citigroup expected to leverage its investment banking strengths. However, uncertainties loom, and the upcoming earnings reports will be crucial in shaping market sentiments and investor confidence.