US Banks Report in Midst of Bond Market Rout

Major US banks could still be under pressure as the rout in the Treasury market continues, and economists are still not sure whether the US will get through the near term without a recession.

The Focus is Still On Provisions

After the last quarter's set of bank earnings, the consensus was that the US economy was resilient enough to boost earnings, but forward risks kept banks cautious as consumers continued to pull back on spending. That seems to still be the view of analysts going into this earnings season, as banks are expected to see earnings impacted as they continue to set aside provisions ahead of expected market turmoil.

The aspect weighing over the banking sector is the continued rise in treasury yields, which have risen at the fastest rate in history. Given that this pushed regional banks into a crisis around March of this year, analysts expect the trend to continue as a potential headwind for the banking sector despite US Treasury Secretary Janet Yellen trying to signal calm. Investors are likely to focus on the banks' guidance and whether or not the third quarter is the time to cut the outlook, even after hiking dividends just a few months ago after passing the Fed's stress test with flying colours.

What the Projections Are

JPMorgan: The largest bank in the US is expected to break its growth cycle and post slower earnings on the top and bottom lines compared to the prior quarter. Q3 EPS is expected to fall back to $3.77 from the $4.75 reported last time, while revenues are expected at $39.0B, less than the $41.3B. JPMorgan has a long history of beating expectations, with the last two revenue numbers above every prediction. However, analysts are more cautious this time as the bank is trying to absorb acquisitions.

Citigroup: Besides provisions, investors will focus on the company's cost-cutting measures as it has seen the least benefit from the higher interest rates as it had to shore up its margins. Earnings are expected to remain relatively stable, with EPS at $1.30 and revenue of $19.3B.

Wells Fargo: The bank with the most retail presence in the US is potentially vulnerable to consumer debt issues if the economy were to sour. This has led some analysts to expect earnings to fall as the bank might have to set aside the largest proportional amount for provisions, with investors potentially concerned about exposure to commercial real estate. Earnings are expected to be practically unchanged at $1.23, with revenue falling to $20.0B.

JPM Long-Term Still Ripe

Price action in JPM suggests further long-term upside as long as the last triangle wave ending at $137 holds. Breaking lower could inspire additional declines towards $123, with interim medium-term support at $132. Staying in the relatively flat territory could see increased demand for $150, with a move past the peak of $160 exposing the triangle's measured-move level near $166.

Source: SpreadEx / JP MORGAN CHASE

Key Takeaways

US banks are facing ongoing pressure due to the turmoil in the treasury market, with concerns about a potential recession looming. Provisions remain a key focus as banks anticipate market turmoil and consumer spending pullback. Investors will closely analyse guidance, with projections indicating slower growth for JPMorgan and stable earnings for Citigroup. With its retail presence, Wells Fargo may experience decreased earnings due to potential consumer debt issues.