Q2 Bank Earnings Preview: Largely Unchanged

Major US banks are anticipated to have comparable results to the first quarter of the year as the Federal Reserve maintained interest rates at present levels and lending activity remained constrained.

No Change, No Improvement

This Friday marks the unofficial start of the second quarter earnings season for major US banks. Analysts predict results will be largely consistent with what was reported in the first quarter, as the underlying fundamentals have not changed all that much. The Fed has maintained interest rates at their current levels, with only a marginal increase in treasury yields over the quarter. Therefore, the cost of credit for banks has remained largely unchanged. Higher interest rates are expected to have constrained borrowing volumes, with any gains from increased spreads being offset by lower volumes. The challenging investment environment has also restricted M&A activity, reducing some non-interest income sources for some major banks.

However, hopes remain that the Fed will finally decide to cut interest rates in the coming quarter, providing some optimism for the banking sector. Repeated new highs in the stock market indicate that trading income may improve, with capital markets volumes increasing by 10% over the previous year. But rising delinquency rates mean the risk of default will likely cause banks to continue bolstering provisions. The Fed's recent stress tests showed banks were more vulnerable to commercial and industrial (C&I) loans than in the previous year, which could further impact earnings.

What to Look Out for in Earnings

JPMorgan's Earnings and Revenue Expected to Decline

JPMorgan is projected to report a fall in EPS to $4.15, as its revenue is also forecast to decrease by 1% to $42 billion. With the US economy anticipated to avoid recession, the focus has shifted from provisioning to the outlook for interest rates and lack of loan growth to generate profits. CEO Jaime Dimon has frequently spoken in the media recently about inflation's negative impact.

Wells Fargo's Profits Forecast to Rise Despite Slight Revenue Dip

The largest US consumer bank, Wells Fargo, is projected to see an increase in net income to $1.29 per share from $1.25 a year ago, in spite of slightly lower revenue of $20.3 billion. The company is expected to have benefited from wider interest margins for retail customers, but investors may be concerned with rising non-performing loan ratios.

Citigroup's Earnings Seen Growing on Higher Revenues

Citigroup is anticipated to grow earnings to $1.39 per share, thanks to higher projected revenues reaching $20.1 billion. The relative rise in M&As over the poorer first quarter is viewed as providing some tailwinds for the international bank. Analyst forecasts for the bank have been increasing during the quarter, allowing its share price to have the best performance in the sector over the last three months. This could place it in a vulnerable position for underperformance if its earnings do not impress investors.

Wells Fargo in C&H?

Wells Fargo's share price increased to $63 in 2024 but then retreated to $56 after struggling to maintain momentum. However, the recent price suggests a 'cup and handle' pattern, with the handle under formation. Should downward pressure continue, the share price may fall below $55, reaching around $51.5 or $47.5. Conversely, if the upward trend resumes, Wells Fargo's price could reach approximately $65 to $70 in the short to medium term and potentially higher in the longer term.

Source: SpreadEx / Wells Fargo

Key Takeaways

Analysts predict US bank earnings will be consistent with the previous quarter since underlying factors have not significantly changed. The Fed kept rates at current levels with slightly higher treasury yields, and borrowing costs for banks remained similar. Higher rates likely constrained loan volumes, though increased interest margins may have offset this. Restricted investment activity also reduced non-interest income from deals. Banks expect potential rate cuts to provide optimism while rising delinquencies mean continued provisions due to higher default risk. Earnings outlooks will focus on rates, loan growth and provisions given current economic conditions.