Wall Street banks are expected to reveal slumping quarterly earnings and gloomy outlooks for the rest of 2023, dogged by the regional banking crisis and a slowing economy.
Earnings per share of the six largest US banks including JPMorgan Chase, Morgan Stanley, and Goldman Sachs are forecasted to decline by around 10% from the previous year, Refinitiv I/B/E/S estimates indicate. These banks are set to report their results on April 14, Reuters reported.
Big banks gained from cheap deposits as savers moved from smaller lenders after the collapse of Silicon Valley Bank last month, which is likely to boost net interest income, analysts said.
JPMorgan Chase, the largest US bank, is predicted to outperform its competitors with its higher net interest margin, or interest earned on loans versus interest paid to depositors.
Meanwhile, Goldman’s earnings per share may drop 20% due to investment banking troubles, following a 69% decline in Q4 profit, hurt by losses in wealth management revenue and consumer business.
The bank is anticipated to reveal a 30% surge in EPS, driven by an almost 36% upswing in net interest income, according to Refinitiv I/B/E/S estimates and Reuters calculations.
However, with a slowing economy and tighter financial conditions, banks are confronted with the possibility of lackluster loan growth and worsening credit quality, compelling them to add provisions to guard against potential losses.
Top Federal Reserve officials previously cautioned that the upheaval surrounding First Republic and Silicon Valley Bank “definitely brings us closer” to a recession.
David Chiaverini, banking analyst at Wedbush Securities, said in a note that bank managements will become more defensive, implementing liquidity measures that could lead to downward revisions for net interest income.
“We expect a challenging earnings season for the banks,” he added.
“From a corporate earnings perspective, we’re already in a recession,” Eric Gordon, head of equities at Brown Advisory, told The Wall Street Journal.
Investment banking powerhouses such as Goldman Sachs Group and Morgan Stanley are likely to be affected by sluggish deals and capital markets activity. Some analysts are also predicting a slowdown in trading revenue.
Trading income, a silver lining in the previous quarters, could suffer from lower equities trading in the first quarter versus a year earlier, partially offset by strength in fixed-income, currencies and commodities (FICC), analysts said.
The S&P 500 bank index is down 14.14% year-to-date.
As interest rates increase, banks earn more money from borrowers’ interest payments than they pay out to depositors, resulting in a projected 30% rise in net interest income for the six largest US banks from the previous year, according to Reuters.
However, gains from interest payments may be offset by bad loans.
Ana Arsov, head of the North American banking team at rating agency Moody’s Investors Service, expects a lending slowdown in areas such as commercial and industrials, autos and mortgages.
“There will still be incremental increases in provisions coming in this year,” particularly for commercial real estate and potentially consumer credit cards, she said.
The latest consumer and producer price reports will also be scrutinized by investors to determine if inflation is subsiding, which is expected to impact the Federal Reserve’s strategy for increasing interest rates.
The upcoming results will give a snapshot of lenders’ ability to finance their operations and whether they have adequate reserves to manage unexpected situations.
“The fears over bank capital and liquidity levels are likely to persist for at least the next few months because of the recent stresses,” Gennadiy Goldberg, U.S. interest rate strategist at TD Securities, said in an interview.
With Post wires