Major US Banks Reporting Friday

Major US banks JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) will kick off the Q4 earnings cycle on Friday, January 12. Goldman Sachs (GS) and Morgan Stanley (MS), on the other hand, will report on Tuesday, January 16 next week. 

Analysts estimate bank earnings will be down in Q4 2023 due to higher expenses, lack of loan demand, and bleak market activity. However, some banks are still expected to report higher revenues, led by the Fed's more hawkish stance on interest rates and strength in business activity.

While 2023 has generally seen stronger profitability amongst banks, there is a risk the lacklustre net interest income seen in Q4 slips into Q1 of the new year. There remains, however, a prospect of more favourable conditions as interest rates are expected to fall.

Major Banks Kick Off Q4 2023 Earnings

US banks are expected to see a surge in bad loans and a drop in earnings for the last quarter of 2023. In fact, non-performing loans are expected to have risen to $24.4 billion for the four largest US banks, up from $18.5 billion compared to Q4 2022.

In addition, earnings are expected to have fallen 13% at the end of 2023, impacted by outstanding loans and higher interest rates.  

Aside from these two metrics, the difference between what banks earn and pay out on deposits, known as net interest income, might have fallen around 10% in Q4 of 2023. Trading revenues might have also declined by 15%, which is expected to hit earnings.   

In the wake of tight capital, banks would have been expected to buy back shares cautiously this year. 

However, only last week saw banks issuing up to $57.9 billion in bond volume, higher than forecasts, as they seem to prepare for tougher regulation following the banking crisis of 2023. In fact, banks are expected to issue around $5 billion per deal to meet reserve requirements.

The economic environment in 2024 is expected to be challenging with slowing growth, interest rate cuts, geopolitical tensions, and tighter regulations. Notably, some uncertainty remains, given that the outcome of the US presidential elections is still unknown.

Expectations For Four Major Banks Reporting Friday

Q4 US bank earnings are expected to have received aid from higher interest rates, but loan growth is likely to intervene, with asset quality forces likely to endure in 2024. JPMorgan Chase is the only bank analysts left with higher earnings estimates over the past three months. It will report first on Friday, followed by BAC, WFC, and Citi.

On Monday, January 8, Deutsche Bank (DBK) upgraded JPMorgan to a "Buy" rate as it saw upside potential from higher net interest income guidance, revenue growth in capital markets, and large reserves.  Zacks analysts estimate earnings per share (EPS) of $3.64 on revenues of $39.03 billion, up 2% and 13% compared to Q4 2022, respectively. 

Bank of America's EPS is expected to drop 23% in Q4 of 2023. However, consensus has been revised down by 1.34% over the last 30 days counting January 5, suggesting more bearishness. On top of EPS expectations, BAC's stock price declined on January 8 due to a large $1.6 billion accounting charge it was forced to record in its Q4 earnings.

Although Deutsche upgraded JPM, it downgraded Wells Fargo to a "Hold" rating. The banks cited concerns about weak net interest income guidance and high vulnerability to commercial real estate loans. Yet, WFC is still expected to report quarterly earnings of $1.15 per share, up 71.6% year-over-year, with revenues of $20.29 billion, up 3.2%.

Finally, analysts estimate Citigroup will report quarterly earnings of $1.04 per share, down 5.5% year-over-year. Revenues are expected to have grown 6% to $19.09 billion. However, the bank has an "Earnings Expected Surprise Prediction" by Zacks of -49.83%, suggesting the actual earnings report may be a miss. Yet, Citi is expected to announce details of a prominent restructuring under its new CEO Jane Fraser. (Source: Yahoo Finance)

Conclusion

US banks are expected to report a sharp rise in non-performing loans and lower earnings in Q4 2023. Although bank stocks had a rough year in 2023, they are showing some signs of progress due to prospects of lower interest rates in 2024. Investors will closely watch banks' guidance and outlook statements for clues about 2024 prospects.