Bank revenues are going to be confusing. What to watch.


Text size

JPMorgan Chase will kick off banking earnings reporting season on Wednesday.

Bess Adler/Bloomberg

For years, bank investors have wanted to see the Federal Reserve launch an aggressive series of interest rate hikes. They finally get their wish, but it’s unlikely to help stocks much in the short term.

Big bank earnings start this week, with

JPMorgan Chase

(ticker: JPM) first out of the gate on Wednesday. Analysts are unsure what to expect from the sector in light of the Fed’s promises of bold action against high inflation on the one hand, and the war in Ukraine on the other.

The Fed’s decision to raise interest rates should be a boon to banks’ net interest income, as it typically widens the gap between what they pay for funds and what they receive from loans. But the recent inversion of the yield curve, with yields on short-term debt higher than those on long-term securities, has Wall Street fearing a recession, which obviously does not benefit anyone.

One thing Wall Street can agree on is that earnings will be weaker than a year ago because the first quarter of 2021 was so strong. Capital markets and business activity have been slower and investors cannot rely on banks releasing billions of dollars in reserves – money set aside to cover pandemic-era loan losses that did not materialize – to increase yields. Across the sector, the S&P Global Markets Intelligence team expects earnings to fall 8.4% despite the benefit of higher rates.

“The Federal Reserve’s efforts to fight inflation will increase banks’ net interest margins, but mountains of excess liquidity will prevent the key measure from returning to pre-pandemic levels above 3.30% through 2026” , according to Nathan Stovall, principal analyst at S&P Global. .

This is a widely held sentiment on Wall Street. Baird analysts expect unspectacular performance from stocks as earnings roll in.

“Even with higher rates in recent weeks, sentiment has turned more negative, reflecting general macro fears and the crowded and consensus-bound group earlier this year. With equities reduced to risk in recent days, we expect that the group is trading well as we progress through the reports,” Baird analyst David George wrote in a recent note.

Barrons warned earlier this year that it was time to be choosy about the banks. Although the industry appears safe, some banks are better equipped than others to meet today’s challenges.

One area of ​​particular concern is the toll that Russia’s invasion of Ukraine will place on US banks. So far, the direct impact appears to be quite minimal, as many banks have abandoned their relationship with Russia in response to sanctions imposed following Russia’s 2014 annexation of Crimea. exposure does not equal zero exposure.

Goldman Sachs

(GS) and JPMorgan recently announced their intention to leave Russia. JPMorgan noted that it could lose $1 billion due to its exposure to Russia. Citigroup (C) said it stood to lose $4 billion. Goldman’s exposure to Russia is $700 million, according to the bank’s financial documents.

And then there are the ripple effects of geopolitical concerns. Although the banks themselves may not be directly exposed to the crisis, their customers may feel the pain more in terms of higher prices and other difficulties in running their businesses. No doubt Wall Street will pay close attention to this when CEOs offer their views on the macro outlook.

In the first quarter results themselves, analysts expect to see weakness in investment banking, particularly in equity markets. Data from Dealogic shows revenue was down 75% year over year and 61% quarter over quarter. The volume of deals that have been announced year-to-date is down almost a third from a blockbuster in 2021. The backlog of deals looks solid, but deals are taking longer to close due to a more difficult regulatory climate.

Trading is also going to be a tough place. The first quarter certainly brought volatility, but it’s unclear whether that benefited the banks. Nonetheless, strength in currency and commodity trading should offset weakness in equities.

Here’s what Wall Street expects from the big banks, according to FactSet data:

JP Morgan: Earnings of $2.72 per share on $30.6 billion in revenue. Net income of $8.2 billion, down 42% from last year.

Citigroup: Earnings of $1.43 per share on $18.3 billion in revenue. Net income of $3.1 billion, down 59% from last year.

Goldman Sachs: Earnings of $8.95 per share on $12 billion in revenue. Net income of $3.3 billion, down 51% from last year.

Morgan Stanley (MS): Earnings of $1.76 per share on $14.4 billion in revenue. Net income of $3.1 billion, down 21% from last year.

Wells Fargo (WFC): Earnings of $0.82 per share on $17.8 billion in revenue. Net income of $3.3 billion, down 30.6% from last year.

Bank of America (BAC): Earnings of $0.75 per share on $23.3 billion in revenue. Net income of $6.2 billion, down 17.7%.

With the smallest drop expected in earnings,

Bank of America

which reports next Monday, is emerging as a street favorite, with 61% of analysts rating it a buy. The consensus price target implies a 28% upside for the stock. While analysts at Keefe, Bruyette & Woods have a market performance rating on the stock, they note it’s “safe play” for this quarter, due to less risk to its markets business. capital and its positive sensitivity to higher rates.

As for the others, expect a bumpy ride.

Write to Carleton English at [email protected]


About Author

Comments are closed.