(Bloomberg) — Fresh off their best quarter since 2021, bank stocks are set for higher-per-share earnings as Wall Street's most influential executives give investors their latest views on the U.S. economy.
Most Read from Bloomberg
JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Friday kicks off the reporting cycle for corporate America, with US bank stocks surging 23% over the past quarter, beating the broader market.
Bank stocks were under pressure for much of 2023, then starting in late October, building hopes that the Federal Reserve could end its rate hike campaign without triggering a recession. Now the focus is on the timing of policy easing, and investors will examine what this means for lenders in all corners of their business, from the health of their loan portfolios to the outlook for deposit rates.
“Banks aren't as cheap as they've obviously been, but at the same time I don't think people believe that banks' valuations are stretched,” said Richard Ramsden, an analyst at Goldman Sachs Group.
If banks are more bullish than expected around net interest income, loan growth, capital markets and deposit pricing, “all of that should lead to higher earnings and relative underperformance for some banks,” Ramsden said.
The KBW Bank Index fell 1% on Thursday, underperforming the broader market and ending the day unchanged.
Also read: Top US banks eager to ease rate pressure after Fed hikes
On Tuesday, attention turns to earnings at Morgan Stanley and Goldman Sachs. The day brings the first results from regional lenders, PNC Financial Services Group reports, making it a bellwether for regional lenders.
Big banks are generally expected to report weaker fourth-quarter results amid higher funding costs. Net interest income for the sector is likely to decline, while higher costs and weaker trading revenue could weigh on earnings, Goldman's Ramsden said in a statement. Credit growth is likely to moderate, he said.
The companies are expected to detail charges to the Federal Deposit Insurance Corporation as a result of the regional bank failures that rocked financial markets early last year. Citigroup said Wednesday that it would cost $1.7 billion to replenish the FDIC fund. Meanwhile, Bank of America said it would take a $1.6 billion charge tied to the Libor change.
The tide turned for bank stocks last quarter as the prospect of Fed interest rate cuts in 2024 eased concerns in areas such as net interest margins.
“Most of the big bank stocks saw a strong year-end rally, fueled by hopes that recession risks have eased enough to not have a major impact on their profits,” said David Bianco, chief investment officer for the Americas at DWS. group. “The risk of big banks taking on big loan-loss provisions or being forced to write bonds is now much lower.”
There are many reasons to be cautious. Inflation is well above the central bank's target, and markets are betting on a more aggressive path of rate cuts than the central bank is signaling. JPMorgan CEO Jamie Dimon said this week that he doubts the central bank's hikes will ultimately succeed in curbing inflation without narrowing gaps in the economy.
Some analysts are advising investors to temper their enthusiasm.
At BMO Capital Markets, James Fotheringham downgraded a handful of US banks and specialty-finance firms behind the rally, warning they were vulnerable to the “coming” credit cycle. Analysts at UBS Group AG, meanwhile, flagged the risk of “wild swings in sentiment.”
“The January earnings season could provide a boost to the sector's recent momentum,” UBS's Erika Najarian wrote in a note this week.
Over the past four weeks, hedge funds have been selling the financial sector, averaging $200 million in weekly outflows, while institutions and retail clients were also net sellers, according to data compiled by Bank of America Corp.
Citigroup Inc. Looking more broadly, financials were the only sector with most analysts' earnings revisions upward last month, according to the data.
Bianco at DWS said it is overweight because of strong profits from big banks including JP Morgan, Bank of America, Citigroup and Wells Fargo. Credit is stable, offsetting a decline in global dealmaking fees, and an increase in initial public offerings has brightened the outlook, he says.
– With the help of Elena Bobina.
Most read from Bloomberg Businessweek
©2024 Bloomberg LP