For the last few years, earnings seasons often roared out of the gate with solid results from the largest handful of U.S. investment banks. That ground to a halt in January when several big banks delivered fair to disappointing Q4 results that didn't do much to impress Wall Street.
Looking ahead to the Q1 financials sector earnings, analysts don't expect a major rebound when the first major investment banks report Friday. Still, a macro environment that includes hope for falling rates, relatively easy credit, and a growing economy might give the industry a wide runway to improve in quarters to come. That's reflected in earnings expectations for the remainder of the year beyond Q1.
But the wild card is the economy.
If inflation falls and the Federal Reserve delivers some of its expected 2024 rate cuts, that could bode well for the biggest banks by helping current economic green shoots keep flourishing in the spring sun. Stronger mortgage application demand, growing mergers and acquisitions (M&A) activity, fresh initial public offerings (IPO), and general trading enthusiasm all helped bank stocks gain ground in Q1.
If coming economic data don't support the market's and Fed's optimistic take for the remainder of 2024, banks could struggle, especially if yields start to climb again and consumers and businesses cut back on their spending. Rates don't necessarily have to fall for banks to succeed, but the industry would probably welcome stability.
"If you ask a banker if they like higher or lower interest rates, they'll tell you what they really like is stable interest rates because it allows them to make their money without interest rate volatility," said Kevin Hincks, senior manager of education at Schwab. "At this point, stable rates are making their businesses easier, along with a good U.S. economy."
Economic strength a tailwind
Bank stocks generally performed well in Q1. The KBW Nasdaq Bank Index (BKX), which includes many of the largest U.S. banks, rose about 8%—not a bad performance on its own but slightly behind around a 10% gain for the S&P 500® index (SPX). However, around half of the SPX's gains reflected the parabolic performance of one mega-cap stock, Nvidia (NVDA). Subtracting Nvidia, banks held up pretty well versus the overall market.
Some big bank stocks even outperformed the SPX, with JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citigroup © all delivering double-digit gains. Goldman Sachs (GS) and Morgan Stanley (MS), on the other hand, trailed the SPX in Q1.
The S&P Financial Select Sector Index, which includes banks, credit card companies, and insurers, rose 12% in Q1 to outpace the SPX, perhaps a sign of investors venturing back into more cyclical sectors like financials as the economy shows continued resilience and the rally branches out beyond traditional stalwarts like tech and communication services. It also speaks to improved bank fundamentals.
"The issues that plagued the banking industry in 2023 appear to be in the rearview mirror," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. "Aside from concerns around one regional bank early in the first quarter, banks have generally held up well given the strong economy and the drop in Treasury yields from the Q4 2023 peak. The drop in Treasury yields helped boost the values of any long-term Treasuries banks may hold on their balance sheets, while the deposit flight we saw following the bank failures last March has generally reversed."
Six key banks are scheduled to report starting Friday, with JPMorgan Chase, Citigroup, and Wells Fargo delivering results that morning, according to Earnings Whispers. Goldman Sachs follows on Monday, with Bank of America and Morgan Stanley wrapping things up on Tuesday.
Q4 disappointment over?
Bank industry investors hope for better tidings this time around following January's somewhat enigmatic Q4 earnings performance. JPMorgan Chase saw its Q4 profit clipped by a $2.9 billion Federal Deposit Insurance Corporation (FDIC) special assessment related to the collapse of several regional banks last year. Wells Fargo and Bank of America also took hits to their Q4 earnings from that one-time occurrence.
The fees helped reimburse the FDIC for what it spent last year to cover uninsured deposits, MarketWatch reported. Overall, S&P financials sector earnings per share (EPS) fell 14.8% in Q4, according to research firm FactSet, despite nearly 8% growth in revenues.
One good thing about Q1 earnings is getting those FDIC fees out of the way. Even so, FactSet doesn't expect the S&P 500 financials sector, which includes these large banks, to gain much on the bottom line in Q1. Its estimate as of late March was for financials sector EPS growth of a relatively anemic 1.9%, trailing expected 3.6% EPS growth for all S&P 500 companies.
Things do look better as the year continues, with financials pulling ahead of the S&P 500 for the full year in terms of projected earnings growth. Financials earnings are seen rising 11.4% in 2024, outpacing the expected 11% S&P 500 EPS growth for the year, according to FactSet.
Signs of improvement in the U.S. economy also could provide a tailwind for banks as 2024 continues. A healthy economy often gets reflected in the banking industry. More consumers and businesses borrow to expand or upgrade their homes or factories. That leads to more hiring, which generally spurs more investing, and new companies launch shares on Wall Street to participate in the growth.
"Global banking and asset management are both doing well, and there's increased M&A and IPO activity along with more capital being raised," Hincks said. "That should help investment banks like Goldman Sachs and JPMorgan Chase."
Credit eases, but real estate jitters persist
Credit spreads have narrowed recently to levels that could make borrowing more attractive. That said, many banks continue to be cautious about loans given last spring's crisis, which saw several banks fail under the weight of high yields.
The U.S. commercial real estate market is still delicate, and the failure of borrowing costs to stay near year-end 2023 lows keeps this issue front and center. For instance, Q1 saw headlines about the struggles of New York Community Bancorp (NYCB), hurt by its exposure to commercial property loans.
Though the biggest investment banks likely would be better positioned to weather struggles in the real estate market, their businesses did see a negative impact from last spring's bank failures because they had to come to the rescue.
Earnings season for the biggest banks offers investors a chance to hear CEO perspectives on the credit market for consumers and businesses as well as their broader take on the possible path of the U.S. economy. Friday's JPMorgan Chase earnings report will include views from the bank's CEO Jamie Dimon, whose outlook can sometimes move the market.
Dimon didn't stay quiet in Q1. Just a few weeks ago, he described the U.S. economy as "booming" and said the Fed should wait to cut rates, MarketWatch reported.
When big banks report, keep an eye on each institution's general level of loan activity and listen to the earnings calls for any hints about the quality of their existing loans. Banks still have a good deal of outstanding loans on their books due for refinancing this year. With rates much higher now than a few years ago, businesses and households could remain wary about renewing or taking on new debt. The mortgage market is a good example.
"On the credit side, spreads are back near their cyclical lows as markets anticipate a 'soft landing,'" Schwab's Martin said. "Financing is still available for publicly traded firms as the economic outlook has improved. Nevertheless, we are concerned that credit quality may deteriorate as consumers rely on credit to maintain their spending levels, and commercial real estate assets may continue to weigh on balance sheets."
Additionally, when yields stay relatively high, banks must pay more to clients to keep money in their accounts. Falling yields at the end of last year and hopes for rate cuts raised optimism that banks might face less pressure here in 2024, but the recent climb in the benchmark U.S. 10-year Treasury note yield (TNX) to three-month highs near 4.3% squelched that. Still, banks have benefited over the last year from strong net interest income, which is the money banks make lending minus what they pay to customers. Eventually, those strong net interest income-driven results are going to get "lapped," meaning banks will face tougher comparisons to year-ago earnings performance.
Another item to watch is loan loss provisions, or the funds banks put aside in case loans go bad. These detract from earnings and have been a near-constant drag on bank results since they began adding to these reserves during the pandemic. One question is whether hopes for lower borrowing costs could make banks feel safe keeping levels where they are.
Even if the strong U.S. economy hits any bumps, the Fed is now in position to slice rates and perhaps take some sting off a downturn.
"The 'Fed put' is back, meaning that if there's a downturn that interest rates will go lower," Hincks said. The idea that the Fed might have the economy's back, so to speak, could be an underlying supportive element for financial stocks.
On an individual level, Citigroup is coming off a large quarterly loss in Q4 and an announcement it would cut 10% of its workforce. Bank of America saw a large drop in Q4 net income, and Wells Fargo warned last quarter that net interest income could be lower this year and raised loan loss provisions.
For major banks reporting Friday, analysts expect the following, according to Yahoo Finance:
- JPM EPS of $4.24, up from $4.10 a year earlier, on revenue of $42 billion, up 6.8% year over year
- WFC EPS of $1.09, down from $1.23 a year earlier, on revenue of $20.18 billion, down 2.7%
- C earnings of $1.38 per share, down from $2.19 a year ago, on revenue of $20.43 billion, up 2.2%
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