Big banks posted higher profits for most of 2023 as regional financial institutions struggled, but their first quarter results are not expected to be impressive.
Investors may not care as long as the big banks can demonstrate how they will benefit if interest rates are higher than expected this year.
“At the end of the day, what is the market paying attention to?” said Ken Leong, a leading bank analyst at CFRA Research.
“We will be very focused on what these banks do for the remainder of 2024-2025.”
Analysts say first-quarter profits for JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) were higher than in the fourth quarter of 2023. , expects to report a decline compared to the same year. previous era.
This is the first year-over-year decline for all four institutions since the Federal Reserve began raising interest rates in the second quarter of 2022. JPMorgan, Wells and Citigroup will report their results on Friday, followed by Bank of America on Tuesday.
These numbers appear to show that even big banks are struggling with weak demand for loans and increasing troubles for some borrowers. Bad loan write-offs are expected to jump 76%, and new reserves to cover future loan losses are expected to rise 31%.
Much of the increase in charge-offs appears to be due to deterioration in credit card loans, said David Fanger, senior vice president at Moody's Investors Service.
However, investors may be more interested in the rest of 2024 than the first quarter. So far this year, they have rewarded the biggest banks at the expense of smaller rivals.
Shares of Citigroup, Wells Fargo, JPMorgan and Bank of America have risen 20%, 17%, 16% and 112% since the beginning of the year, outperforming the major indexes.
Changes in expectations about how much the Fed expects to cut interest rates this year could help push these stocks higher if banks expect higher profits for the rest of the year.
Traders are now expecting one or two rate cuts instead of the six they expected at the start of the year, citing strong economic data and signs of persistent inflation.
Fewer cuts actually benefit the big banks, as they can increase loan volumes while keeping funding costs relatively low, boosting a key measure of profit known as net interest income. . This dynamic allowed us to generate profits for most of 2023.
Ebrahim Poonawalla, a major banking analyst at BofA Securities, told Yahoo Finance: “Each time the frequency and timing of rate cuts increases, people update their expectations of what net interest income will be this year.'' ” he said.
As 2024 progresses, “better-than-expected net interest income growth and credit quality outperformance could lead to upward revisions to EPS estimates,” Gerald Cassidy, a leading banking analyst at RBC, said in a research note on Monday. “There is,” he said.
Also potentially helping big bank stocks is more optimism about trades and trades for the rest of 2024. This issue will be of particular interest to shareholders of Goldman Sachs (GS) and Morgan Stanley (MS), two Wall Street-dependent financial institutions. That report is on Monday and Tuesday.
Large banks are expected to report first-quarter revenue from debt underwriting and IPOs rose while advice on mergers and acquisitions remains delayed, with the issue set to become a major issue for banks heading into 2023 and 2022. This will be a big challenge for us.
“What we've seen so far is a strong recovery in debt underwriting,” BofA's Poonawalla said, noting that regulatory oversight hasn't translated into large deals.
According to Moody's Fanger, it just takes time to recoup M&A.
“The transactions that were completed this quarter were completed in the second or third quarter of last year,” he said.
Bank of America may buck that trend, but overall trading revenue is expected to be lower than last year, analysts predict.
Investors may not be as enthusiastic about regional banks, which begin reporting their earnings in the coming weeks. Midsize financial institutions pay much more than large institutions to maintain their deposits, so they would suffer even more if the Fed actually kept interest rates high for an extended period of time. is expected.
Local banks also face increased exposure to some commercial real estate loans that have lost value and need to be refinanced, creating new challenges for some financial institutions such as New York Community Bancorp (NYCB). It is the cause of
“Big banks have more diversified revenues and don't have as much exposure to commercial real estate,” Chris McGratty, regional bank analyst and head of U.S. banking research at KBW, told Yahoo Finance.
KBW expects big banks' profits to rise 4% for all of 2024. Regional financial institutions and small financial institutions are expected to see a 9-10% decline in net profits over the same period.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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