Bad debt and high interest rates set to drag on US banks’ earnings
A combination of bad debt, the lingering impact of interest rate hikes and fallout from a regional banking crisis is expected to weigh on US banks’ latest earnings.
Bank of America, Citigroup, JP Morgan and Wells Fargo are set to report fourth-quarter results on Friday. Goldman Sachs and Morgan Stanley’s earnings – focused more on investment banking and asset management – are due next Tuesday.
Shares in these six biggest US banks hit fresh highs last summer as they reaped the benefits of the Federal Reserve’s interest rate hikes.
However, the central bank’s move to higher-for-longer rates has increased competition for deposits and eroded lenders’ net interest margins – a key measure of profitability reflecting the difference between what banks pay out and receive in interest payments.
Lenders’ shares are rebounding from dips in October and November as the US economy shows signs of resilience and the central bank pencils in multiple rate cuts this year.
However, analysts expect the six biggest lenders to see an average 13 per cent drop in earnings compared to last year’s fourth quarter.
A mountain of bad debt threatens to drag on results, with a Bloomberg analysts’ consensus estimating that non-performing loans – which are subject to late repayment or unlikely to be paid – will rise to a total of $24.4bn in the fourth quarter.
Meanwhile, the impact of interest rate hikes from last year continues to linger and has raised the cost of deposits.
“The market appears to be pricing in two historically incompatible catalysts in 2024: a significant 150 basis point cut in rates and a soft landing,” UBS analysts said in a note.
Several big banks will also be hit by a one-time charge for a special assessment to recover a $18.5bn hit to the Federal Deposit Insurance Corporation’s insurance fund when regional lenders Silicon Valley Bank and Signature collapsed last year.
“After a strong rally in global investment bank stocks to end 2023, US leaders need to show potential earnings benefits for 2024 from an improved economic outlook,” Alison Williams, an analyst at Bloomberg Intelligence, told City PM
“The potential for an investment banking fee recovery, with pipeline in focus, will also be key to watch for. Potential optimism is likely to keep compensation costs sticky in 4Q. Expense views are the focus for 2024 profitability expectations, and we expect the cost to compete to keep views elevated even as banks improve efficiency.”
Analysts generally expect Citigroup, Wells Fargo and Bank of America to post a decline in profits, while JP Morgan’s latest updates suggest it may outperform its upgraded estimates.
JP Morgan, the world’s largest bank by market capitalisation, raised its guidance on net interest income twice last year after beating revenue expectations due to higher interest. Shares have jumped some 25 per cent in the last year.
The lender took over the $50bn-strong deposit base of Silicon Valley Bank after its failure last March.
Analysts estimate JP Morgan’s fourth-quarter revenue growth will be sevenfold the average of its peers at 13.2 per cent.
The market will be looking to see what progress Citigroup has made on cutting costs.
Scottish chief executive Jane Fraser announced a sweeping restructuring for the troubled lender in September. Full details are yet to emerge, but it is expected to involve thousands of job cuts.
Investors’ confidence in the bank seems to be recovering as Citigroup’s shares have been steadily climbing since November.