America’s big money center banks kick of first quarter earnings next week. There will be extra attention on them with the recent banking turmoil. Guidance will be keenly watched for from the money center banks. Concerns are rising over the banking sector’s exposure to commercial real estate. JPMorgan Chase (JPM), Citigroup (C), PNC Financial Services Group, Inc. (PNC) and Wells Fargo (WFC) reporting Q1 results on Friday. We got a preview from JPMorgan CEO Dimon saying that banking system is strong and sound despite the banking crisis raising the odds of a recession, and that the crisis is not over yet.
According to Bloomberg estimates, JPMorgan, Citigroup and Wells Fargo could have seen deposits shrink sequentially by a total of $63 billion for the quarter, a decline of 1.4% on average. Deposit levels and liquidity rather than full-year profit guidance will be key for investors.
Bank Earnings Schedule
- JPMorgan Chase (JPM), Citigroup (C) Wells Fargo (WFC) PNC Financial Services Group, Inc. (PNC) on Friday, April 14, 2022
- State Street Bank (SST) Charles Schwab (SCHW) M&T Bank (MTB) will report on Monday April 17, 2023
- Goldman Sachs (GS) BNY Mellon (BNY) Bank of America (BAC) on Tuesday April 18, 2023
- Morgan Stanley (MS) U.S. Bancorp (USB) Zions Bancorporation (ZION) Citizens (CFG) on Wednesday, April 19
- Huntington (HBAN) Comerica (CMA) KeyBank (KEY) Truist Financial Corp (TFC) on Thursday, April 20
First Quarter Bank Earnings Previews
- What to Expect from Wells Fargo Earnings
- What to Expect from PNC Earnings
- What to Expect from Citigroup Earnings
- What to Expect from JPMorgan Earnings
Higher Interest Rates Increase Revenue …. But at a Cost
Understandably there is a crisis of confidence in regional banks sparked off by last month’s collapse of Silicon Valley Bank. We warned last quarter higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
“US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses… Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms… The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period.”April 7 – Bloomberg (Alexandre Tanzi)
Major tightening of real estate lending unfolding
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years.
With concerns rising over the banking sector’s exposure to commercial real estate, asset quality at Pittsburgh-based PNC Financial Services Group is being scrutinized in earnings. Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn.
Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
JPMorgan (JPM US), Citigroup (C US), Wells Fargo (WFC US) and BlackRock (BLK US) could give a more comprehensive picture of how empty downtown office buildings are hitting real estate lenders and investors. Management could also discuss how they are dealing with rising competition for deposits.
Though some bigger names saw deposits swell in the flight to safety following the regional banking turmoil, more money is flowing out of deposits into money-market funds. Deposits at the largest 25 commercial banks fell by $90 billion in late March, according to Bloomberg Intelligence, and banks are likely to have to raise rates to compete.By Redd Brown and Gabriel Sanchez April 6, 2023 Bloomberg
How was it all a Surprise to Bankers, Regulators and Markets?
Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks have continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.
FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.
What Analysts Are Watching:
- Net interest Margin: This comes down to what the bank lends at and how they fund it. The yield curve has flattened which means the spread between short-term interest rates and long-term rates has narrowed. This lowers the margin banks make in the fixed interest and lending markets. It will also differ between the top and bottom tier banks. Analysts see NII growth continuing to receive a boost from last year’s rate hikes, but that may not last after the Fed signaled a slowdown in rate increases could be near.
- Trading Volumes: Trading volumes have fallen away in stock and fixed interest markets as many investors stayed on the sidelines due to volatility and losses. Events like the FTX fraud have also caused losses and hurt sentiment with financial markets unravelling.
- Investment Banking: Fee income has also collapsed; IPO activity was the lowest since the 1970’s. Likewise mergers and acquisition activity has dried up. With that so have all those big fees.
- Credit Quality: How much have the banks provided for losses and what are their expectations. Accounting for expected credit losses and how banks manage loan-loss provisions gives an insight where banks think credit quality is heading in a new downward cycle.
- Unrealized Losses on Investment Securities: How large are the losses, have losses been taken and are they hedged? This will affect ROE and EPS. Simply the value of assets held has been diminished, but by how much?
- Loan Growth: How strong is loan growth and in what areas? What quality is that debt? Does loan growth build in higher-yielding segments alongside increasing commercial utilization rates, or cautious corporates and a weaker consumer sees loan growth come to a grinding halt?
What Analysts Are Saying:
Morningstar – Eric Compton, CFA Apr 5, 2023
Although we believe the U.S. banking sector as a whole is currently undervalued, the three banks that we think most deserve investor focus in the lead-up to first-quarter earnings are Comerica CMA, U.S. Bancorp USB, and Citigroup C. Each has its own risk/reward setup.
We believe the biggest risks to our top picks would be negative surprises on deposit bases or funding costs, or the realization of a recession in the near term. While we think the U.S. banks are already trading at recessionary valuations, an actual recession would be unlikely to help valuations in the short term.
Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn. Consensus sees the bank setting aside an additional $308 million in loan-loss provisions in the first quarter, compared to the $208 million released in the same period a year ago.
Yet PNC is expected to hold up well to heightened scrutiny over bank deposits; according to data compiled by Bloomberg, the rate of funds leaving PNC’s balance sheet quarter-on-quarter is expected to slow to less than a percentage point, compared to about 1.5% a year ago. PNC’s ability to rein in expenses will also be assessed in its pre-open earnings report, with consensus seeing non-interest costs rise by about 6% from a year ago, the first increase in three quarters.
“1Q earnings will likely be pressured, in our view, as we see banks shift towards a more defensive and conservative stance, and we anticipate a slew of downward revisions to guidance,” Wedbush analysts said in a March 29 research note. “We expect loan growth to slow from the strong pace over the prior few quarters as demand cools in light of higher rates and the uncertain economic environment.”
Last Quarter’s Major Bank Earnings:
Source: JPM, WFC, PNC, C. GS, BAC, MS, WSJ
From the TradersCommunity Research Desk