Wall Street Banks' Q3 Loan Revenues at 2-Year Low, Investment Banking Rebound Expected
The US stock market earnings season kicks off this week, with bank stocks leading the charge. Alongside the Federal Reserve's interest rate cuts, what changes can be expected in the Q3 earnings reports of US investment banking giants compared to the previous year?
Analysts anticipate a decline in net interest income for US investment banking giants in the third quarter, coupled with an increase in provisions for potential loan losses, which will impact the overall profitability of banks. However, influenced by the Federal Reserve's rate cuts, investment banking activities are expected to recover, with profit-generating transactions such as mergers and acquisitions, and equity underwriting gradually warming up.
Among the major banks, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates and are significantly affected by the decline in net interest income. On the other hand, Goldman Sachs and Morgan Stanley have business models that are more inclined towards investment banking, trading, and asset management, earning more from investment banking activities than other banks. Therefore, it is expected that their profits for the third quarter of this year will increase.
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This Friday morning, JPMorgan Chase, the largest bank in the United States, and Wells Fargo, the third-largest, will release their Q3 earnings reports. The following week, Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs will also announce their financial results.
Net interest income is feared to hit a two-year low, and loan losses are gradually increasing. According to data from Bloomberg, investors expect that the overall net interest income for JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo in Q3 of 2024 will be slightly below $62 billion, a nearly 5% decrease from Q3 of 2023, marking the lowest level since the end of 2022.
At the beginning of 2022, the Federal Reserve rapidly raised interest rates, leading to a significant increase in net interest income for major banks, as bank deposit rates rose more slowly than lending rates. However, this boom began to weaken this year, as banks gradually increased deposit rates before the Federal Reserve's rate cut in September, narrowing the space for net interest income.
Furthermore, due to high interest rates suppressing borrowing demand, loan growth in the United States this year has been relatively slow, with the exception of credit card loans. Analysts predict that the Federal Reserve's rate cuts could encourage households and businesses to increase their debt.
It should be noted that although loan losses at major US banks are still at very low levels, they are gradually increasing as consumers have depleted their savings from the pandemic period, while the cost of living continues to rise. HSBC analyst Martinez stated:"Credit has consistently performed well and has shown a certain level of resilience during economic slowdowns. Signs indicate that this situation should continue. However, after all, these are banks, and fluctuations can occur occasionally, even during good times. I believe that our complacency about credit has led us to overlook potential risks, and any fluctuations could be seen as negative signals."
In summary, due to the decline in net interest income, coupled with an increase in provisions for potential loan losses, the overall profits of banks will be hit.
Among major banks, JPMorgan Chase is the most affected by the Federal Reserve's interest rate cuts and interest rate changes.
JPMorgan Chase is the bank that benefits the most from high interest rates, with a higher proportion of short-term or cash-like securities in its assets. These securities yield more when interest rates are high, but their returns have decreased after the Federal Reserve's interest rate cuts. Morningstar's research analyst Suryansh Sharma said:
"Our view has always been that JPMorgan Chase benefits a lot when interest rates rise, mainly because of the structure of its balance sheet. Now, when interest rates fall, JPMorgan Chase will be at the greatest disadvantage among major banks."
Last month, an executive at JPMorgan Chase warned that analysts' expectations for JPMorgan Chase's net interest income in 2025 were overly optimistic. This statement made investors uneasy, leading to a more than 5% drop in JPMorgan Chase's stock price. Analysts revised JPMorgan Chase's net interest income for 2025 from $91.5 billion to $89 billion.
Similar to JPMorgan Chase, Bank of America, Citibank, and Wells Fargo are highly sensitive to interest rates, and net interest income is an important source of their overall revenue.
Goldman Sachs and Morgan Stanley's business models are more inclined towards investment banking, trading, and asset management, so they are less affected by the compression of net interest income.
Investment banking business is expected to recover.Analysts widely anticipate that the investment banking business of major U.S. banks in Q3 2023 will show growth compared to the same period last year. The average investment banking revenue of JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup is expected to grow by at least 20%, with new stock issuance and bond underwriting business expected to be particularly strong.
Over the past two years, the Federal Reserve has aggressively raised interest rates to curb inflation. While this has been beneficial for ordinary savers, it has also made large companies cautious about making significant decisions such as acquiring smaller competitors or selling off parts of their business, which are core activities for investment banks.
As the Federal Reserve begins to reverse its monetary policy, the business of investment banks is expected to recover.
Moody's rating analysts pointed out in a report that the volume of debt and equity issuance by major banks in the third quarter generally increased, completed mergers and acquisitions transactions remained flat, and while the U.S. stock initial public offerings (IPOs) are still at a historical low, they have more than doubled compared to a year ago. Therefore, investment banking revenues are expected to grow.
As mentioned above, Goldman Sachs and Morgan Stanley have business models that are more focused on investment banking, trading, and asset management, and they earn more revenue from investment banking business than other banks. Therefore, after two years of downturn, their profits in the third quarter of this year are expected to increase.
Analysts estimate that Goldman Sachs' Q3 profits will grow by 26% year-on-year, and Morgan Stanley's net profit will grow by 12.5% year-on-year.
Sell-side analysts' expectations for Q3 financial reports of major U.S. banks
As analyzed above, profits for Goldman Sachs and Morgan Stanley are expected to grow in the third quarter of this year, while JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates and are significantly affected by the decline in net interest income.
According to FactSet data, sell-side analysts have made expectations for the third quarter financial reports of major U.S. banks and compared them with the actual results of the third quarter of 2023, as follows:
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