Big Banks Kick Off Fourth Quarter Earnings Season with Citigroup, JPMorgan, Bank of America and Wells Fargo

America’s big money center banks kick of fourth quarter earnings this week. FactSet expects the ‘Big 7’ to post $28 billion in fourth-quarter profits, which is down 15% from a year earlier. JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC). and Wells Fargo (WFC) reporting Q4 results on Friday. Goldman Sachs (GS) and Morgan Stanley (MS) will report next Tuesday January 17 and PNC Financial Services Group, Inc. (PNC) and Charles Schwab Corp (SCHW) on January 18. Truist Financial Corp (TFC) reports January 19 and the last of the big ten banks to report will be U.S. Bancorp (USB) on January 25.

Bank Earnings Schedule

  • JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC). and Wells Fargo (WFC) reporting Q4 results on Friday, January 13, 2022
  • Goldman Sachs (GS) and Morgan Stanley (MS) will report Tuesday January 17, 2022
  • NC Financial Services Group, Inc. (PNC) and Charles Schwab Corp (SCHW) Wednesday January 18.
  • Truist Financial Corp (TFC) reports Thursday January 19
  • U.S. Bancorp (USB) on January 25.

Fourth Quarter Bank Earnings Previews

Higher Interest Rates Increase Revenue …. But at a Cost

With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. 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:

RBC Capital MarketsGerard Cassidy

NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”

Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.

Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”

“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”

Wedbush

Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,

“Peak loan growth in the current cycle could be behind us.” Fourth-quarter results are likely to show loan growth at a “solid” but moderated” pace. “Particularly concerned” about the slowing pace of CRE. Noted it typically takes around a year after the Fed begins a rate-hike cycle for loans to “begin rolling over.”

Loan growth could go two ways: either momentum builds in higher-yielding segments alongside increasing commercial utilization rates, or “cautious corporates and a weaker consumer” causes “loan growth [to] grind to a halt.”

“While loans have been growing, deposits have been shrinking,” “Depositors are waking up and starting to demand yield on their cash”.

Barclays

Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”

Over the past year the KBW Nasdaq Bank Index, which includes the largest banks, underperformed the broader S&P 500 in 2022. The first week of 2023 saw the KBW get ahead on Friday with the main indices all up at least 2.0%.  The lead came from the Treasury market, highlighted by a 32 basis points decline in the 10-yr note yield to 3.56%. The 2s10s inversion widened to 71 basis points (from 54 basis points at the start of the year) while the 3mo10yr inversion widened to 105 basis points (from 53 basis points at the start of the year). 

The XLF (Finance Sector) was down 12.42% for 2022

Last Quarter’s Major Bank Earnings:

Markets are pricing in a 4.95% peak Fed funds rate at the June 14th FOMC meeting, with rates then declining to 4.48% by the final meeting of the year on December 13th. Any manic asset pricing or robust numbers expect swift push back against market expectations for a 2023 Fed pivot. The FOMC is at least broadcasting strong consensus on the committee that tight conditions will be necessary, at least through the end of the year. Stay alert, is the message from us.

Source: JPM, WFC, PNC, C. GS, BAC, MS, WSJ

From the TradersCommunity Research Desk