(Bloomberg) — After their best quarter since 2021, bank stocks are set for a high-stakes earnings show as Wall Street’s most influential executives give investors the latest opinions about the U.S. economy.Thank you for reading this post, don't forget to subscribe!
Most read from Bloomberg
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. And Wells Fargo & Co. kicked off the reporting cycle for corporate America on Friday, after U.S. bank stocks surged 23% last quarter, outperforming the broader market.
Bank stocks were under pressure for most of 2023, and then began to fall in late October as confidence built that the Federal Reserve would end its rate-hike campaign without starting a recession. The focus now is on the timing of policy easing, and investors will be examining what this means for all corners of lenders’ business, from the health of their loan portfolios to the outlook for deposit rates.
“Banks are obviously not as cheap as they were, but at the same time I don’t think people believe banks are overvalued,” said Richard Ramsden, an analyst at Goldman Sachs Group Inc.
If banks are more bullish than expected about net interest income, loan growth, capital markets and deposit pricing, “all of this will clearly contribute to higher earnings and possibly relative outperformance for some banks,” Ramsden said.
The KBW Bank Index fell nearly 1% on Thursday, underperforming the broader market, ending the day largely unchanged.
Read More: Top US banks eager for relief from rate pressure after Fed hike
On Tuesday, the focus turns to earnings from Morgan Stanley and Goldman Sachs. The day also brings the first results from regional lenders, with PNC Financial Services Group reporting, making it a signal for regional lenders.
the story continues
Big banks are generally expected to report disappointing fourth-quarter results amid higher funding costs. Goldman’s Ramsden said in a report that net interest income for the sector is in decline, while increased expenses and weak trading revenues are also likely to weigh on earnings. Loan growth will probably remain modest, he said.
The companies are also expected to detail payments they made to the Federal Deposit Insurance Corp. as a result of the regional bank failures that roiled financial markets early last year. Citigroup said Wednesday it expects it to cost $1.7 billion to replenish the FDIC fund. Meanwhile, Bank of America said it would take a $1.6 billion charge associated with the LIBOR transition.
The situation changed for bank stocks last quarter as the prospect of a Fed rate cut in 2024 reduced concerns over areas like net interest margins.
“Most major bank stocks saw a strong year-end rally, driven by optimism that there will be no major impact on their profitability as recession risks become much lower,” said David Bianco, chief U.S. investment officer at DWS. Is.” Group. “The risk for large banks to take large loan-loss provisions or be forced to write down securities is now much lower.”
There are plenty of reasons to exercise caution. The inflation rate remains well above the Fed’s target, and markets are betting on a more aggressive path of rate cuts than the Fed has indicated. JPMorgan Chief Executive Officer Jamie Dimon said this week he was skeptical that the Fed’s hikes would ultimately succeed in controlling inflation without putting the brakes on the economy.
Some analysts are advising investors to reduce their enthusiasm.
At BMO Capital Markets, James Fotheringham downgraded a handful of US banks and specialty-finance firms behind the rally, warning that they appear vulnerable to an “imminent” credit cycle. Meanwhile, analysts at UBS Group AG flagged the risk of “wide swings in sentiment.”
“January earnings season could accelerate the sector’s recent momentum,” UBS’s Erica Nazarian wrote in a note this week.
Over the past four weeks, hedge funds have been selling the financial sector, with weekly outflows of an average of $200 million, while institutions and retail clients were also net sellers, according to data compiled by Bank of America Corp.
Yet, looking more broadly, financial companies are the only sector where most analysts saw earnings rising over the past month, according to Citigroup Inc. data.
At DWS, Bianco said he maintains an overweight position on big banks including JPMorgan, Bank of America, Citigroup and Wells Fargo due to their strong profitability. He says credit has been stable, offset by a decline in global dealmaking fees, and a surge in initial public offerings has brightened the outlook.
-With assistance from Elena Popina.
(Updated with Thursday’s trading.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg LP