US bank sector earnings season: high expectations for these big players
Wall Street expects big things when results season for American lenders kicks off on Friday. Markets do tend to do well at earnings time, but will they this year? Graeme Evans reports.
11th October 2023 14:03
by Graeme Evans from interactive investor
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%.
- Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers
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.
- Lloyds Bank shares: Q3 2023 results preview and new price target
- Buy this solid $200bn stock when it does this
- Birkenstock IPO: will investors hotfoot it after the shares?
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.
- Stockwatch: the implications for investors of new Middle East conflict
- Dumb Money: when investors get caught out by bubbles
- Time to sell this great company as results loom?
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.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.