Banks kick off the US fourth-quarter earnings season this week, with JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Company (NYSE:WFC) and Bank of America Corp (NYSE:BAC) reporting on Friday.
After strong 3Q earnings, bolstered by a confluence of factors including higher interest rates and resilient performance in key business segments, the focus will turn towards the likes of any increase in consumer impairments, shareholder returns, the progress of dealmaking activity and the outlook for the coming quarters, according to Richard Hunter, head of markets at interactive investor.
Online platform IG noted that expectations are for most major US banks to turn in positive revenue growth from the previous year.
“Notably, a double-digit growth (11.8%) for JPM is the consensus, with optimism surrounding the revenue and cost synergies brought by the ongoing integration of First Republic Bank (NYSE:FRC) into its business,” IG wrote in a preview article.
“On the other hand, BAC is expected to be the exception with a negative top-line growth (-2.6%) out of the major US banks, while turning in the biggest earnings per share (EPS) decline (-19.9%)."
Despite the expected rise in JPMorgan’s revenue to $39.8 billion, the lender is expected to report a 0.7% year-over-year decline in earnings per share (EPS) to $3.53, according to Refinitiv data.
Similarly, Citigroup is likely to post a 5.6% rise in revenue to $19 billion but a 9.9% decline in EPS to $0.99. Wells Fargo is slated to grow 4Q revenue by 3.4% to $20.3 billion, with EPS more than doubling to $1.24, per the Refinitiv data.
Rate cut expectations
The significant plunge in bond yields in the final quarter of 2023 on rate cut expectations may help ease some pressures on banks’ funding costs, while a recovery in bond prices could alleviate the losses on their securities portfolios.
However, concerns arise about the impact on net interest income as banks adjust to lower rates, with attention to the potential resilience of net interest margins.
“Based on the Federal Reserve’s data which tracks commercial bank balances, lending activities in the 4Q 2023 may remain weak, amid tighter lending standards and high interest rates," IG wrote.
“This seems to be a continuation of the prevailing trend throughout 2023, and market participants will be on the lookout for any positive surprises on the lending front from the banks.”
With the market hoping for a soft landing scenario into 2024, IG said there will be a strong focus on banks’ forward guidance.
“During 3Q 2023, the major banks have provided lower-than-expected allowance for credit losses, with a decline from 2Q 2023,” IG said.
“The extent of provisions for credit costs provides a gauge of economic risks that the banks foresee, therefore, market participants will want to see loss provisions moderating further towards ‘normal’ levels (levels preceding the Covid-19 pandemic) to support views of soft landing.”