Earnings Kick-Off: JPM A Trendsetter For US Banks?

Higher interest rates have not rebounded to the benefit of banks lately, as they have to take higher provisions ahead of a pending economic downturn and see deals drying up.

The Crisis That Is Not Yet Here

Earnings season is upon us once again with the release of earnings reports from major US banks. Perhaps the most followed will be JPMorgan, not just because it's the biggest but also because it's the first to report and could be a bellwether for the rest. Its CEO Jamie Dimon had been vocal about the threat of a recession in the first half of this year but hasn't said much since the end of that period with no recession. The last time he talked about a recession threat was in May, in the wake of the regional bank crisis, and there he had a more optimistic tone. Investors will be curious to hear what he has to say now.

Top banks passed the latest stress tests with flying colours and were able to raise their dividends subsequently. The question now is whether they will keep provisioning as aggressively in the wake of more hope for a soft landing and better test results. That could help support profits on the bottom line. But the banking sector, more broadly, still faces many challenges, with higher rates pressuring unrealised losses, mounting commercial real estate vacancies, and rising credit delinquencies. The big banks are expected to post the largest loan losses since the pandemic.

Facing the Squeeze

As US consumers saw their savings dwindle with rising prices, they found it harder to get credit. Americans piled on credit card debt and are increasingly unable to pay it back. It's estimated that JPMorgan's total credit card charge-offs reached $1.1B last quarter, almost doubling from the prior quarter. This has left investors uncertain about the banks' earnings, with an extensive range of analysts' forecasts.

JPMorgan is expected to report a slight drop in earnings to $3.98/shr, but Revenue to slightly increase to $39.3B.

Wells Fargo is also expected to see a slight drop in the bottom line to $1.16/shr, with Revenue slightly lower at $20.1B.

Citigroup is expected to be the worst off of the top three big banks, with earnings expected to drop to $1.31/shr on lowered revenues of $19.3B.

JPM Breaking Higher

JPM's price recently broke into '22 territories after completing an ascending triangle at $137. Only yesterday, the stock reached $150, a 17-month high, opening up $160 and the all-time high of $173. The measure-move, the length of the triangle's open, points to $165. Losing the triangle's top trendline at $145 might add pressure, exposing the triangle's last swing and the one before at $132. Significant support lies at $123, which could signal a full-blown reversal. 

Source: SpreadX / JP Morgan Chase

Key Takeaways

US banks are facing challenges despite higher interest rates as they make provisions ahead of a potential economic downturn and experience a decrease in deals. The upcoming earnings report from JPMorgan, the largest bank, is highly anticipated as it could indicate the overall state of the sector. While top banks have passed stress tests and raised dividends, provisioning and its impact on profits remain uncertain. Analysts expect varying levels of declines in earnings for JPMorgan, Wells Fargo, and Citigroup. Despite these challenges, JPMorgan's stock price recently reached a 17-month high, indicating potential for further growth.