Large banks posted higher profits for most of 2023 as regional lenders struggled, but their performance in the first quarter of 2024 is not expected to be stellar.
Investors shouldn’t mind as long as the giant banks can show how they will benefit if interest rates stay higher than expected this year.
“What is the market paying attention to at the end of the day?” said Ken Leon, a major bank analyst at CFRA Research.
“It’s really about what these banks are going to do for the rest of 2024 and 2025.”
Analysts expect JPMorgan Chase (JPM), Wells Fargo (WFC), as well as Citigroup (C) and Bank of America (BAC) to report their first-quarter earnings rose compared to the fourth quarter of 2023 However, they fell in the same year. before period.
This year-over-year decline has not occurred at all four institutions since the Federal Reserve began raising interest rates in the second quarter of 2022. JPMorgan, Wells Fargo and Citigroup report results on Friday and Bank of America on Tuesday.
Their numbers are likely to show that even the largest banks are struggling with lower demand for loans and increasing problems for some borrowers. Bad debt write-offs are expected to increase by 76% and new provisions to cover future loan losses are expected to increase by 31%.
David Fanger, senior vice president at Moody’s Ratings, said much of the increase in write-offs is likely due to weakening credit card loans.
But investors may be more interested in the rest of 2024 than the first quarter. So far this year, they have rewarded the largest banks at the expense of their smaller competitors.
Citigroup shares are up more than 18%, while Wells Fargo and JPMorgan are each up more than 15% so far this year, outperforming major indexes. Bank of America is up 8%.
What could help push these stocks higher would be if banks forecast higher profits for the rest of the year as expectations change about the number of interest rate cuts the Fed expects this year.
Due to hot economic data and signs of persistent inflation, traders now expect one or two cuts instead of the six they had predicted earlier in the year.
Fewer cuts actually benefit the giant banks because it allows them to charge more for their loans while keeping financing costs relatively low, which boosts a key profit metric, net interest income. This dynamic has helped them generate profits for much of 2023.
“Every time the number of rate cuts and timing shifts, the Street updates its expectations of what net interest income could look like this year,” Ebrahim Poonawala, a major banking analyst for BofA Securities, told Yahoo Finance.
Gerard Cassidy, a major bank analyst at RBC, said in a research note on Monday that we could see upward revisions to EPS estimates throughout 2024 driven by better-than-expected net interest income growth and credit quality outperformance. “
What could also help big bank stocks is more optimism about dealmaking and trading for the rest of 2024. That theme will be for shareholders in Goldman Sachs (GS) and Morgan Stanley (MS), two Wall Street dependents Institutions, this report will be of particular interest Monday and Tuesday.
Big banks are expected to report that revenue from bond underwriting and initial public offerings rose in the first quarter, while mergers and acquisitions advice is still lagging – extending a problem banks are predicting for 2023 and 2022 posed major challenges.
“What you’ve seen is that debt insurance business is picking up significantly,” said BofA’s Poonawala, who also noted that regulatory scrutiny has not been conducive to large deals.
According to Moody’s Fanger, M&A recovery simply takes longer.
“What is being completed this quarter were deals that were agreed in the second or third quarter of last year,” he said.
Trading revenues are expected to decline across the board compared to last year, although analysts estimate Bank of America could buck that trend.
Investors may not be so kind to regional banks as they begin reporting results in the coming weeks. Mid-sized lenders are expected to have more difficulty if the Fed actually keeps interest rates higher for longer, as they pay much more than large lenders to keep their deposits intact.
Regional banks are also more impacted by some commercial real estate loans that have lost value and need to be refinanced, which is a growing source of problems for some institutions such as New York Community Bancorp (NYCB).
“Larger banks’ revenues are more diverse and they don’t have as much exposure to commercial real estate,” Chris McGratty, regional banking analyst and head of U.S. banking research at KBW, told Yahoo Finance.
For the full year 2024, KBW expects the major banks’ profits to increase by 4%. Regional and smaller lenders will see a 9-10% decline in their net income over the same period.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, crypto and other financial areas.
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