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A major bank recovery is about to be put to the test
Big bank stocks are outperforming the rest of the S&P 500 (^GSPC) this year, and investor confidence is about to be put to the test.
JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (W) all report their second-quarter results on Friday, kicking off another earnings season for the U.S. banking sector. Bank of America (BAC) reports the following Tuesday.
Shares of these banks — the four largest in the U.S. — have risen more than 20% since January, outperforming the S&P 500. That performance is also nearly double the gains of an index that tracks the broader sector, the KBW Nasdaq Bank Index (^BKX).
Big bank investors are optimistic about the ability of the largest financial institutions to thrive as the Federal Reserve slowly cuts interest rates, regulators water down a set of new bank capital rules and Wall Street business returns.
The Fed’s policy path – currently expected to be one or two cuts in 2024, followed by more in 2025 – “really bodes well” for the big bank group in the coming year, said Gerard Cassidy, banking analyst at RBC Capital Markets.
Read more: What the Fed Rate Decision Means for Bank Accounts, CDs, Loans, and Credit Cards
But the actual results from the big banks during the second quarter are unlikely to surprise, despite a key number from JPMorgan that is likely to surprise all rivals.
JPMorgan is expected to report a sizable net profit due in part to a multibillion-dollar pretax accounting boost resulting from a share swap in credit card giant Visa (V), but analysts say that won’t draw much attention from market watchers.
“I think the market will quickly write this off as an unusual or one-off event,” said Scott Siefers, a large bank analyst at Piper Sandler.
There will likely be more focus on what JPMorgan has to say about a key measure of lending profits known as net interest income.
Jamie Dimon, CEO of JPMorgan Chase. (AP Photo/Alex Brandon) (ASSOCIATED PRESS)
That profit—which measures the difference between what banks pay out on deposits and receive from their loans—is expected to be smaller than in the previous quarter. The same is true for the other three big banks.
Even the biggest banks have struggled with the move, as deposit costs remain high, demand for loans remains weak and the Fed has been slower than expected to cut interest rates.
“Investors expect second-quarter net interest income to ideally be the low point for big banks this year,” Siefers added.
The results from big banks are also likely to reveal the cautious approach these lenders are taking toward lending, as higher rates pose more challenges for their borrowers.
The story continues
New provisions set aside to cover future loan losses at the Big Four banks are expected to rise 26% from the last quarter. By comparison, the pace of loan-loss provisions at all commercial banks began to level off earlier this year, rising 0.30% in the quarter, according to Federal Reserve data.
Where results should be considerably better is in the Wall Street operations of these big banks, as trading recovers from poor performances in 2023 and 2022.
The big four banks, along with Wall Street experts Goldman Sachs (GS) and Morgan Stanley (IN), all are expected to show sizable jumps — an average of more than 30% — in investment banking fees compared with last year. Goldman and Morgan Stanley report earnings on Monday and Tuesday.
David Solomon, CEO of Goldman Sachs. REUTERS/Mark Stockwell (REUTERS/Reuters)
The big event all banks are waiting for is when the Fed finally decides to start cutting rates from a 23-year high. The current market bet is that this could happen as early as September.
For smaller regional banks, the sooner rate cuts come, the better. They are more dependent on lending income and thus have been hit harder by an industry-wide decline in net interest income. They are also more exposed to weaknesses in the commercial real estate market.
Investors have pushed down shares of several regional and small banks this year, new problems or concerns arise.
It happened last week after the Dallas First Foundation bank (FFWM) announced a $228 million infusion of new investors to help reduce its concentration of multifamily apartment loans.
This also happened in June, after an analyst report exposed the debt held by OZK Bank (OZK) and in May, when a short seller targeted Axos Financial (AX) on the quality of your home loans.
Concerns about the commercial real estate market began earlier this year when New York Community Bancorp (new York) has set aside a surprising amount of money in case of loan losses, partly for rent-regulated apartment complexes in the New York City area.
NYCB shares plunged, but the company managed to calm the market with an emergency capital injection from a group that included former Treasury Secretary Steven Mnuchin.
Former Treasury Secretary Steven Mnuchin. Alex Wong/Pool via REUTERS (REUTERS/Reuters)
All this turmoil has “lowered investor expectations” for regional banks, said Bank of America analyst Ebrahim Poonawala.
Investors will be on the lookout for more vulnerabilities as many mid-sized institutions report in the coming weeks.
For these lenders, “the optimistic scenario is that their actual credit losses will be significantly lower than what is being priced into their stocks,” Chris McGratty, a regional banking analyst at KBW, told Yahoo Finance.
But institutions that rely heavily on commercial real estate lending likely won’t get the benefit of the doubt until the credit cycle closes, McGratty added.
An index that tracks the share prices of regional banks (KRE) has been stable since the beginning of the year.
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrencies, and other areas of finance.
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