What to Expect from Q3 Bank Earnings Starting This Week

U.S. banks are expected to see lower earnings in their third-quarter financial reports due to the ongoing impact of higher deposit costs.

The Fed’s interest rate cut, and the potential for more in the future, means those costs could fall in coming quarters. The Fed’s current benchmark rate is 4.75-5%, but it projects its median rate may decrease to 3.4% by the end of 2025 and lower to 2.9% in 2026.

In 2022, banks initially benefited from the Fed’s rate hikes, allowing them to increase loan rates and expand their net interest income (NII), the key driver of profitability for most lenders. However, deposit costs have risen sequentially in recent quarters while loan growth has stalled.

Deposit costs should also ease beginning in the current fourth quarter, and analysts foresee surging bank earnings starting next year. According to analysts with Keefe, Bruyette & Woods, industry-wide profits will rise 8% in 2025 and another 12% in 2026, MarketWatch reported.

Here’s a closer look at what to expect when large U.S. banks report third-quarter results.

Net Interest Income

According to Visible Alpha estimates, most large banks likely experienced a drop in net interest income on both a year-over-year and a sequential basis.

However, Bank of America (BAC) and Goldman Sachs (GS) are exceptions. Consensus projections have Bank of America’s NII increasing by 1% from the second quarter, despite a 4% decline compared to last year. For Goldman Sachs, NII likely rose year-over-year but decreased from the previous quarter.

At the other end of the spectrum, Wells Fargo (WFC) is expected to report a sixth consecutive quarterly decline in NII, down about 9% from the third quarter of last year. Rising deposit costs bear the blame.

JPMorgan Chase (JPM), the largest bank, exemplifies the industry’s challenge to secure funds. While its deposits likely fell for the second quarter in a row and remained flat year-over-year, it had to pay significantly more to maintain them. Interest costs on deposits rose by an estimated 18% compared to a year ago and have increased by two-thirds over the past 18 months.

Loans—And Getting Them Paid Back

Consumer spending propelled the economic engines for most of the year but seemed to sputter over the past few months, raising concerns about consumer financial health.

Even banks acknowledged this worry during their second-quarter earnings commentary as consumer credit card debt ballooned and more people fell behind on loan payments. Not only did high interest rates deter people from taking out new loans, but they also made it harder to repay that debt.

Loan growth estimates remained relatively stagnant at most large banks in the third quarter on both a sequential and year-to-year basis. Among large banks, Citigroup (C) likely posted the highest loan growth from last year’s third quarter at 4%, though it recorded no estimated growth compared with the previous quarter.

Meanwhile, allowances for potential loan losses and charge-offs for existing bad loans continued to rise sequentially meaning another pressure point on profits. Compared to a year ago, Visible Alpha estimates that charge-offs surged an average of 55% across JPMorgan, Citigroup, Bank of America, and Wells Fargo.

Asset Management and Investment Banking

Rising stock and bond markets, partly due to expectations of a Fed rate cut, have boosted wealth management fees for most banks. But now that the Fed has started cutting rates, investors may focus more on the economy’s condition. If the economy slows more than expected, financial markets—and wealth management fees—could decline.

Bank of America. however, remains optimistic. It recently stated it continues to “peg the highest probability on a soft-landing” for the U.S. economy.

Meanwhile, lower expected investment banking revenue at most banks reflects a continued lack of interest in mergers and acquisition (M&A). Deal volume in the U.S. in August fell to its lowest level year-to-date, down 22% from July.

Goldman Sachs is expected to report higher earnings, mainly due to lower depreciation expenses and rising commission fees. Here again, though, the Fed’s rate cuts could encourage more M&A activity in the future, potentially boosting investment banking revenue in coming quarters.