Bank Earnings on Wall Street Deck: What to Expect

A sign hangs on One Chase Plaza in lower Manhattan, New York City, on Oct. 14, 2014. Spencer Platt/Getty Images

Third-quarter bank earnings will be on Wall Street’s radar over the next two weeks.

JPMorgan Chase & Co., Wells Fargo & Co., and Bank of New York Mellon report on Friday, and Citigroup reports early next week.

FactSet, which tracks S&P 500 earnings reports, expects the financial sector to report a yearly earnings decline of 0.4 percent for the third quarter. Banks are expected to fare far worse within the industry and register a yearly decline of 12 percent.

FactSet attributes the lackluster performance of banks to sluggish net interest income and mortgage revenues, and weak fees from mergers and acquisitions.

Analysts expect JPMorgan, the banking industry leader, to report third-quarter earnings of $4.01 per share, which would be a decrease of 7.4 percent from last year, on revenue of $41.7 billion, which would be an increase of 5.1 percent for the year.

For Wells Fargo & Co. (WFC), analysts see quarterly earnings of $1.28 per share, which would be an 8.6 percent decrease for the year, on revenues of $20.38 billion, a 2.3 percent decrease over the same period.

Bank of New York Mellon is expected to fare better. The consensus analysts estimate $1.39 per share, which would be a 10.2 percent from a year earlier, on $4.52 billion in revenues, a 3.3 percent increase for the year.

Still, there could be surprises on a couple of fronts.

One of them is on the second line of the income statement, “credit losses provision.” Between 2022 and 2023, JPMorgan’s credit losses rose by nearly 50 percent and WFC’s by nearly 300 percent.

Another front for surprises is net interest income. On Sept. 10, for instance, at the Barclays Global Financial Services Conference in New York City, JPMorgan warned that its net interest income has been under pressure, sending its shares 5 percent lower.

Paul Kutasovic, professor of finance at the New York Institute of Technology, sees net interest income as the main story driving bank earnings in the near term.

“As the Federal Reserve has raised the federal funds rate over the last few years, banks have benefited by positioning their balance sheet to take advantage of the higher rates,” he told The Epoch Times via email.

“As a result, net interest income rose and boosted bank earnings. This favorable trend is coming to an end. The recent 50 basis point cut in fed funds rate signals a change in policy and the beginning of an extended rate cutting cycle by the Fed.”

Since the Federal Reserve began raising interest rates to fight inflation following COVID-19, the banking industry has been on a wild ride. In the beginning, higher interest rates boosted the net interest rate spread, the difference between the interest rate banks pay to raise funds from deposits and the interest rate they receive from investing this money in Treasury Bills, Treasury bonds, and giving loans.

However, as interest rates continued to rise and banks competed for deposits, the interest rate spread narrowed, squeezing bank profits and liquidity.

The problem was more acute for regional banks, as demonstrated by the fallout of Silvergate Capital Corporation and SVB Financial Group in the spring of 2023.

Meanwhile, high interest rates are beginning to affect commercial real estate loans and credit card loans.

Data from the Federal Reserve Bank of Saint Louis shows that commercial loan delinquencies have doubled over the past two years, while credit card delinquency rates have tripled over the same period.

While delinquency numbers for both types of loans are still too low by historical standards to pose any threat to the sector, they could affect the balance sheets and income statements of banks with significant exposure to these two types of loans.

Another thing worth watching about the sector is Warren Buffett’s holding company, Berkshire Hathaway’s, recent moves to sell shares of Bank of America.

According to regulatory filings, the value investment company with an affinity for the banking sector sold $338 million worth of Bank of America shares last week, following another $228.7 million sale in early September.

Still, FactSet sees a silver lining for the banking sector as the nation’s central bank is easing liquidity, and earnings comparisons are favorable compared to the current low levels.

Kutasovic believes things will worsen for banks before they improve in the new monetary regime.

“In this environment, net interest income will fall, putting pressure on bank earnings. On the plus side, lower rates are likely to stimulate borrowing and loan growth at the banks, offsetting the lower net interest income,” he said.

“Once the Fed’s rate-cutting cycle is over, we should expect strong earnings growth from the banking sector as net interest income normalizes, loan growth accelerates, and the loan portfolio improves.”

He sees Wall Street reacting positively to this prospect.

“Bank stocks should begin to rally in anticipation of ending the rate-cutting cycle,” Kutasovic said.

Michael Martin, vice president of market strategy at TradingBlock, will pay more attention to future guidance.

“With inflation steadily dropping and a robust labor market, there’s growing optimism around a soft landing for the economy—though Jamie Dimon remains a skeptic,” he told The Epoch Times via email.

“A stronger economy and lower interest rates may boost bank borrowing and deal-making.”

Additionally, Martin points out that October is historically a volatile month for stocks.

“Combine this with the upcoming election, and there’s potential for trading profits at large U.S. banks to increase from heightened volatility,” he said.