What You Need To Know Ahead Of Big Bank Earnings

Big bank earnings kick off Friday with Citi (C), Wells Fargo (WFC) and JPMorgan Chase (JPM) reporting their second-quarter results. Bank of America (BAC) is set to follow on Tuesday.

Analysts expect few surprises from the big banks this earnings season, though investors are eying the possibility of interest-rate cuts by the U.S. Federal Reserve, which could affect banks’ outlooks.

The S&P 500’s 4% second-quarter gain, with indexes at record highs, bodes well for investment banking and trading revenues for big banks, especially at the likes of Goldman Sachs (GS) and Morgan Stanley (MS).

Here’s what investors and customers will be watching for in the days to come.

Net Interest Income

Net interest income (NII), one of the key profitability measures of bank lending, captures the money banks make from interest on loans after accounting for payments on interest-bearing accounts.

As the Fed hiked rates to 23-year highs to tame inflation, banks enjoyed a boost to their NII. But as deposit rates crept higher, lifted by competition for customer money after the regional banking crisis last year, the measure has come under pressure.

JPMorgan, unlike rivals Citi, Wells Fargo and Bank of America, is projected to post a higher second-quarter NII than it did a year earlier, according to analyst estimates compiled by Visible Alpha.

“Investors will be watching for signs that the much-awaited bottoming in net interest income is in hand,” wrote Bank of America Securities analysts, especially as loan growth remains challenged in a high interest rate environment.

Analysts at Piper Sandler said that NII for Bank of America could “trough” this quarter, and then ” begin a more powerful inflection upward,” while Wells Fargo’s could “bottom later this year” and JPMorgan’s could “compress” over a longer period. Bank of America beat NII estimates in the first quarter, while Wells Fargo and JPMorgan fell short.

If the Fed cuts rates, that could begin showing up on the banks’ books next year.

“The timing [and] magnitude of the Fed down cycle will still be the largest factor for 2025 NII growth potential,” said Jefferies analysts, projecting five rate cuts of 25 basis points through the end of 2025.

Rising Costs and Lost Revenue

A clamor for deposits and higher rates on interest-bearing accounts has driven up costs for banks. Jefferies analysts believe a peak in such costs is “still a quarter or two away.”

Additionally, banks are expected to lose revenue if the caps on credit-card late fees and bank account overdraft fees passed by the Consumer Financial Protection Bureau go into effect. The caps are currently being appealed following a lawsuit from industry groups. 

In response, JPMorgan Chase may begin charging customers a fee for their checking accounts, according to a Wall Street Journal report.

Then there’s Wells Fargo, which is losing as much as $10 million every month on its co-branded credit card for renters, which offered customers points for paying rent. The card, launched in 2021 with Bilt Technologies, saw Wells pay Bilt a 0.8% fee on each transaction despite the fact that it hasn’t been collecting interchange fees from landlords. 

At Citi, Wall Street will be watching closely at the bank’s first full quarter report after ending its massive restructuring program launched in September last year.

Risks For Banks

Two big risks for banks in the near term are capital requirements arising out of the Fed’s recently concluded stress tests and their exposure to commercial real estate (CRE) loans.

What The Stress Test Results Mean For Banks

The stress tests revealed that big U.S. banks are stable, but they stand to incur greater losses should they face challenging conditions compared to last year. That’s partly on account of riskier assets on their balance sheets and higher expenses.

Big banks will be subject to minimum Common Equity Tier 1 (CET1) ratios requirements, with Goldman Sachs being hit the hardest with a requirement of almost 14%.

While these rules are put in place to protect banks from failing, critics argue that setting aside more money to meet capital requirements could lead to banks making fewer loans to individual customers or small businesses or lending at higher interest rates.

According to Bank of America analysts, that might create a “near-term negative” for Goldman’s stock while rivals such as Wells Fargo (whose stress test requirement is lower than the management’s own) and Citi that saw a drop in its needed capital may fare better.

Investors will look for cues from the banks’ management teams about how they plan to navigate these additional requirements.

Commercial Real Estate Exposure

CRE loans could be a big headache for banks. Property owners are struggling to refinance at higher interest rates, and loan delinquencies are rising while property prices plummet.

Regional bank stocks were rattled earlier this year amid concerns around CRE loans, especially after a string of failures last year.

Though CRE loans are considered a bigger problem for regional banks, big banks are not completely immune either. Accounting for credit lines to Real Estate Investment Trusts (REITs), big banks have higher exposure to CRE loans than it may first appear, a May study found.

Reserves at Wells Fargo held against CRE reached 7.9% in the first quarter, Bank of America analysts said.

Banks’ Stock Buybacks Could Slow

Share repurchase programs could slow given the disappointing stress test results, Jefferies analysts said.

Morgan Stanley reauthorized a $20 billion buyback expected to begin in the third quarter of 2024, analysts said, while Goldman Sachs has $23 billion remaining of a $30 billion program authorized in February 2023. 

For Goldman, Jefferies projects $250 million in buybacks starting in the third quarter, an 83% drop from the pace that the bank set for buybacks in the preceding two quarters.

For Citi, BofA analysts project $1 billion in quarterly buybacks in the second half of 2024.