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U.S. Banks Brace for Modest Profit Declines Amid Interest Rate Adjustments
As major U.S. banks gear up to unveil modestly reduced profits for the first quarter, the spotlight is on the expected increase in interest income for the year as per executives’ forecasts. JPMorgan Chase is anticipated to report a 4% decrease in earnings per share (EPS) from the same quarter last year, according to analysts’ predictions from an LSEG survey, with Citigroup and Wells Fargo projected to see drops of 35% and 11%, respectively. Expectations for Goldman Sachs indicate a 13% fall, while Bank of America and Morgan Stanley are forecasted to experience declines of 18% and 2%, respectively.
The analysis is largely focused on how changes in U.S. interest rates might boost banks’ net interest income (NII), highlighting the difference between interest earnings on loans and the interest paid on deposits. “This theme dominates this quarter, with expectations pointing towards a positive impact on earnings,” noted Kenneth Leon, research director at CFRA Research. With the Federal Reserve’s rate hikes since March 2022 aimed at controlling inflation, banks have enjoyed record profits, making their NII forecasts a critical measure of future performance.
Market anticipation regarding Federal Reserve rate cuts has adjusted, with predictions now suggesting fewer cuts than previously thought. Analysts from Morgan Stanley, including Betsy Graseck, suggest JPMorgan, Bank of America, and Wells Fargo could see NII gains from sustained high rates. However, the rise in rates might also stress consumer finances, potentially leading to increased loan delinquencies, though not significantly affecting earnings, according to Chris Marinac, director of research at Janney Montgomery Scott.
Banks focusing on retail and corporate services have slightly outperformed their Wall Street-centric counterparts due to a slump in deal-making activities. Citigroup, Wells Fargo, and JPMorgan have emerged as the top performers in the S&P 500 banks index for the year. Share prices for these banks have seen notable increases, with Citigroup up 19.9%, Wells Fargo rising about 17%, and JPMorgan nearly 16%, outpacing the S&P 500 banks index’s gain of around 13%.
The M&A sector shows signs of revitalization, with bankers expressing optimism for a recovery, potentially benefitting Goldman Sachs and Morgan Stanley, which depend more on investment banking revenue. Market trading outlook remains a key focus, with JPMorgan predicting a 5% to 10% dip in market revenue for the first quarter.
Citigroup’s CEO Jane Fraser’s growth strategy update is highly anticipated following a significant reorganization and layoffs. “We’re expecting progress,” Marinac stated, indicating optimism for the banks’ future. Leadership transitions are also in the spotlight, notably at JPMorgan, as the board considers successors for CEO Jamie Dimon.
Investor attention is also on Wells Fargo’s efforts to comply with regulatory demands and mitigate its penalties, including an asset cap that restricts its growth.
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