Some of the largest US investment banks, including Citi, JPMorgan, State Street and Wells Fargo, will publish their first quarter results on Friday. They will be followed by Bank of America, Morgan Stanley and Goldman Sachs next week.
The Banker spoke to analysts who said they do not expect any great surprises, and many of the themes that were present in the results from the last quarter of 2023 will appear again.
Market watchers will want to see if Citi chief executive Jane Fraser’s ambitious restructure of the bank has started to reap results, while a similar dynamic is at work in Goldman Sachs. CEO David Solomon has led the move away from consumer banking to focus on the bank’s core activities of trading and dealmaking.
Meanwhile Morgan Stanley’s desire to grow its wealth management arm to align with its investment bank will also be closely followed.
The big picture
In a research note, HSBC says that it expects the reporting period to be characterised by continued quarter-on-quarter and year-on-year declines in net interest income.
This is due to pressure on commercial loan balances and deposit cost increases that will affect most banks, with the exception of JPMorgan and Citi. HSBC expects improving investment bank fees driven by rising debt and equity activity. Higher net charge-offs (the proportion of a loan unlikely to be paid back), especially in credit cards, as well as strong cost discipline, is likely to be an element of the earnings season, too.
HSBC adds that the outlook for credit quality is likely to worsen for both net charge-offs and office commercial real estate. The effect on banks will be different, however, as credit card net charge-offs will likely rise materially quarter on quarter at JPMorgan, Citi, Bank of America and Wells Fargo.
That reflects both seasonal trends and some deterioration in the financial conditions for some borrowers.
HSBC says that it will be paying close attention to 30-day delinquency trends. Recent monthly data from card issuers suggest that the pace of delinquency rate increases is slowing, indicating that peak net charge-offs in cards could materialise later in 2024.
By contrast, CRE only represents 1 to 3 per cent of loans at the large investment banks that HSBC covers, and therefore it believes the potential for stress is low. The banks’ leaders will flag these issues in the results.
All of these factors point to mediocre results.
Christopher Wolfe, managing director, North American banks at Fitch Ratings, says: “We think the quarter will be somewhat lacklustre. The Fed’s rate cuts have not materialised since the beginning of the year.”
He adds: “The market forecast six rate cuts this year and we at Fitch forecast three instead. Overall we believe margins will be somewhat flattish and loan growth will be relatively muted with a bit more on the consumer side.
“The trading business numbers will not be that bad over the quarter, but on capital markets we think that activity might show up in subsequent quarters if the pipeline builds. Banks continue to build reserves for credit generally on both CRE and the consumer side. The deposit picture will look OK while M&A activity has been muted so far.”
One potential flashpoint to watch out for is the Federal Deposit Insurance Corporation’s need to replenish its deposit insurance fund, which was emptied following the failures of Silicon Valley Bank and Signature Bank in March 2023.
According to the FDIC, from Q1 2024 large banks have been told to make payments known as special assessment fees over eight quarters to refill the deposit insurance fund’s coffers.
In November 2023, the agency estimated that the losses would amount to around $16.3bn, which was later revised to $20.4bn in February 2024.
“These amounts are not trivial and PNC Financial Services Group has indicated it will pay an additional $130mn,” adds Wolfe. “For the bigger banks it will be more as these fees are based on bank deposit size and you would hope that is the end of the matter.”
Specifics to look for
According to a BoA note, Wall Street will be monitoring the resilience of Citi’s earnings relative to its reductions in headcount and exits from many business lines.
It sees JPMorgan’s “premium stock valuation” underpinned by fewer rate cuts, capital flexibility and top leadership. On Morgan Stanley, analysts would like to understand how well wealth management revenues are holding against the ambitious expectations set by CEO Ted Pick.
Only a pick-up in capital markets activity will help Goldman Sachs get a surer footing, as competition, structural pressures and stringent global regulation weigh on the bank.
On Wells Fargo, the BoA note says: “The Street appears to be discounting the value of a more sure-footed and growth-focused management team, especially if CEO Charles Scharf can engineer an exit from the Fed-imposed asset-cap over the next 12-18 months.”
