US bank sector earnings season: high expectations for these big players

Leading US banks are under pressure to deliver after Wall Street set a high bar on expectations heading into Friday’s results by JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC).

Data provider FactSet’s preview of the third-quarter season shows the financial sector, which includes insurers, brokerages and payment firms, is predicted to report the fourth highest year-over-year earnings growth rate of all 11 S&P 500 index sectors at 8.7%.

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That contrasts with an estimated 0.3% earnings decline in the wider S&P 500, a performance representing a fourth straight quarterly fall but the weakest decrease in this run.

More than 40% of the S&P 500 companies that are scheduled to report earnings in the next two weeks will come from the financial sector, with others in the calendar including Goldman Sachs (NYSE:GS) on Tuesday and American Express (NYSE:AXP) on Friday 20 October.

Within this group, the banking sub-sector is predicted to report the third highest year-on-year earnings growth rate at 4%.

However, analysts at Morgan Stanley believe investors have been too optimistic in their expectations for a near-term improvement in net interest margin, as well as in relation to hopes for better-than-expected expense management and loan growth.

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They see the margin taking a step down in the fourth quarter, given that history suggests deposit costs only peak one to two quarters after the Federal Reserve starts cutting rates.

The bank thinks the one exception is JPMorgan, where chief executive Jamie Dimon recently stated 2023 net interest income excluding markets "could be a little better than" the prior guide of $87 billion (£70.1 billion).

JPMorgan Chase is the largest US bank in terms of balance sheet and has enjoyed a sharp acceleration in net revenue growth as interest rates have moved higher. Its net income hit $14.5 billion (£11.8 billion) in the last quarter compared with $8.6 billion a year earlier.

For the third quarter, Saxo Bank said JP Morgan’s net revenues are expected to grow 22% year-on-year for a 24% rise in earnings per share to $3.90. This should be helped by still benign levels of  loan provisions as the labour market has remained robust.

JP Morgan’s shares are 16% above their low for the year seen during the US regional banking crisis in March, but down by 7% from July’s high after a retreat for the S&P 500 index on  expectations of further Federal Reserve interest rate rises.

Across the industry, FactSet said it will be interesting to see how the third-quarter’s 76 basis points increase in the 10-year Treasury yield has impacted capital levels.

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Other points to watch include the degree of stabilisation in deposits and whether overdraft fee revenue has picked up as consumers use up the above-trend savings accumulated during Covid.

FactSet banking director Sean Ryan said: “Overall loan growth should remain very sluggish, though loan loss provisions should continue rising reflecting both current and prospective credit-quality deterioration.”

The S&P 500 is down 7% since the start of August but has rallied this week on comments from various Federal Reserve policymakers suggesting that rates may have peaked.

Deutsche Bank said that 80% of time the US market rallies during earnings season, and by an average of 2%.

It added: “The extent of this typically depends on performance and positioning going into it. Going into this season, we've had a notable pull-back and investors are now underweight, which leaves our strategists fairly optimistic. We will see if the macro world supports that view in the next few weeks.”