Source: Zhitong Finance

Just a few months ago, some of Wall Street's biggest banks also took turns warning that record crowding, which is their biggest source of revenue, is coming to an end. Now, some banks are expected to raise their loan earnings expectations.

As market expectations for interest rate cuts fall short of previous expectations, analysts expect that some large banks will raise their 2024 net interest income guidance when they start announcing results on Friday. Net interest income (NII) is the difference between a bank's return on assets and debt expenses.

Whether J.P. Morgan will improve the NII guidelines is the most speculation. Analysts believe the $90 billion NII guideline is too conservative considering current expectations for interest rate trends. Wells Fargo is another bank that has sparked controversy over whether it is possible to adjust expectations.

Piper Sandler analyst R. Scott Siefers said, “The first three things people will pay attention to will be J.P. Morgan's NII guidelines, J.P. Morgan's NII guidelines, and J.P. Morgan's NII guidelines!” “This is a very conservative guideline: the question is actually how much J.P. Morgan will improve.”

The rapid rate hike by the Federal Reserve boosted$JPMorgan (JPM.US)$,$Bank of America (BAC.US)$,$Citigroup (C.US)$und$Wells Fargo & Co (WFC.US)$With the banks' revenue, the total net interest income of these banks last year reached a record 250 billion US dollars. In January of this year, when the market expected to cut interest rates as many as 6 times, they all predicted that the indicator would decline.

Morgan Stanley's Betsy Graseck said that some large asset-sensitive banks are likely to raise their financial estimates, while UBS Securities' Erika Najarian believes investors are optimistic about such measures.

Although high interest rates are a good thing for big banks, they have caused great pain to many regional banks — some banks even went out of business after buying US Treasury bonds in droves because the value of US Treasury bonds declined as interest rates rose. Banks must also begin to pass on interest rates to savers, otherwise customers risk being taken away by higher-yielding options — a pressure that hurts regional banks even more.

Siefers said, “At the most basic level, the global market favors higher interest rates or higher interest rates for a longer period of time, while regional markets prefer to gradually cut interest rates within this range.”

The stock price performance of major US banks has always been better than the market so far this year. The three major banks and Bank of America, which will release financial reports on Friday, all surpassed the increase in the S&P 500 index during the same period.

Interest rate uncertainty

Regardless of analysts' expectations, bank management may not raise their expectations in the first quarter while the interest rate situation remains unstable. J.P. Morgan Chase could also choose to postpone until Investor Day in late May before revising its outlook.

Thanks to strong consumer spending and a strong labor market, the US economy has shed fears of a recession, and the US just announced its biggest employment growth in nearly a year. All of this has increased the possibility that Fed officials will further delay interest rate cuts, and the rate cuts they are considering this year are also lower than expected.

Ibrahim Poonawala of Bank of America's Global Research Department said, “There has always been a negative argument that interest rate hikes are bad for the banking industry due to fears of a possible hard landing.” “What people overlook, however, is that interest rates remained high for a longer period of time because of a strong economy. This quarter will debunk some of those negative elements.”

On Monday, J.P. Morgan Chase CEO Jamie Dimon warned the economy that under inflationary pressure, US interest rates could reach 8% or higher. He also expressed doubts about the market's expectations for a soft landing, which he believes will be far lower than the current 70 to 80 percent range.

Analysts estimate that the net interest income of the four largest US banks is currently expected to grow moderately by 1% in the first quarter. This is largely driven by J.P. Morgan Chase's projected increase of nearly 12% over the previous year.

Trading rebounded

Expectations of interest rate cuts have also boosted a recovery in M&A transactions after a continued slump, as investors and companies are more adaptable to this trend. Capital market activity is also expected to increase.

Morgan Stanley's Graseck said in a report, “Most major M&A indicators have given a green light, and there has been an increase in M&A activity announced in the past two quarters.” “We expect deal announcements to accelerate and complete construction by 2024.”

Although slower than its peak in 2021, the IPO market is picking up. Goldman Sachs Group said in February this year that this year's IPO activity will continue to improve.

According to analysts' estimates, the investment banking business of large banks is likely to grow by 10% to 15% in the first three months of this year. Bank of America CFO Alastair Borthwick said in March this year that the bank's investment banking division's revenue in the first quarter is expected to increase 15%.

KBW's Christopher McGratty said that despite these encouraging signs, the challenging regulatory environment, upcoming US elections, and ongoing geopolitical uncertainty are reasons to remain cautious.

Loans, credit cards

Analysts said loans are likely to remain sluggish as interest rates and inflation remained high in the first quarter. As the pent-up savings in consumer accounts gradually faded away, credit card balances also rose.

Meanwhile, UBS's Najarian said that a possible reduction in interest rate cuts and a key presidential election in the US weakened the reasons for “re-acceleration” of loan growth in the second half of this year.

However, compared with the fourth quarter of last year, the net write-offs of the four largest US banks will remain basically stable.

Piper Sandler's Siefers said, “What we have seen has not deteriorated as much as we thought.” “Now, if the Federal Reserve stays here (with interest rates) for a long time, then at some point, all bets will be down, and we may see a more marked deterioration.” “But now I think banks are generally describing the situation as normalizing.”

Editor/jayden