Banks once again are gearing up to report Q1 earnings, which will give investors and economists alike more insight into where the strong and weak spots are in financial markets and systems. JPMorgan Chase (NYSE: JPM) and BlackRock (BLK) will kick off the earnings reports on Wednesday.
Consumer and business banking and the higher interest rates will provide some lift, while equity capital markets and reduced M&A activity are likely to detract from earnings.
Rates on the rise:
Banks are expected to see some improvement as interest rates started climbing in the quarter. Still, the Fed has only started its tightening cycle, so most of the benefits from a more hawkish Fed lie ahead. “We’ll get a lot of leverage” from rising rates, said Bank of America (NYSE: BAC) CEO Brian Moynihan on CNBC less than three weeks into Q1.
Morgan Stanley analyst Betsy Graseck sees higher rates likely boosting consensus net interest income outlooks at many banks. She expects the biggest beneficiaries to be Wells Fargo (WFC), Bank of America (BAC), and SVB Financial (SIVB).
Consumer banking is expected to help drive Q1 earnings. And so far, higher inflation has not tamped down spending. Early in Q1 BofA’s Moynihan said consumers were continuing to spend. The bank’s consumer clients made $ 249B in payments in February, following a record $ 335B of payments in January.
“Fundamentals are holding up well near term with better loan growth, rising net interest margins (NIMs), and continued strong credit quality – the weakness currently is in investment banking and other markets-related revenues,” wrote JP Morgan analyst Vivek Juneja in a note. He also agrees that consumer spending continues to recover.
Charges and loss of earnings from Russia exits are likely small at most banks relative to other issues, JP Morgan’s Juneja said. Citigroup (C) will be the most affected. In February, the bank disclosed a total exposure of $ 5.4B in Russia as of Q4 2021, making it the 21st of its top 25 country exposures.
On the positive side, lending activity rose in Q1, with the greatest strength in commercial real estate and consumer lending including credit cards, auto loans and revolving consumer credit, Odeon Capital analyst Dick Bove said in a note to clients.
Morgan Stanley’s Graseck also points to accelerating loan growth, especially in commercial and industrial and card units. She names KeyCorp (KEY) and PNC Financial as positioned best for C&I lending and American Express (AXP) and Capital One Financial (COF) on the card side.
On the negative side of the equation, equity capital market activity slowed drastically in through mid-March. Dealogic data showed five of the largest US banks – Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS), and Citigroup (C) combined pulled in $ 645M from ECM fees, down from $ 5.3B in the same period of 2021, the Financial Times reported.
And with more volatile stock prices and surging inflation, M&A activity has also slowed, as buyers and sellers find it more difficult to agree on a price. The number of M&A deals in North America fell 16.7% Y / Y in February and the value of those deals fell 30% in the same month, according to S&P Global Market Intelligence data.
Still to be seen is whether banks start to increase loan loss reserves, a sign that they expect the US economy to slow or weaken. “A non-cash charge, loan loss reserves, is likely to determine earnings in the quarter just as it has in the last eight,” said Odeon’s Bove. “This is not likely to enthuse investors so that bank stocks may continue to flatline.”
Capital returns decelerate:
Morgan Stanley’s Graseck also expects capital returns to slow as two major factors hurt capital levels in Q1 – accumulated other comprehensive income (“AOCI”) is expected to be hurt by unrealized losses on banks’ AFS portfolios as rates increase; and higher value-at-risk for banks’ trading portfolios due to elevated market volatility. Trust banks’ book value per share are most affected AOCI risk, and money center banks will feel the most sting from higher trading risk-weighted assets, she said.