Source: Wall Street See
Analysts expect the net interest income of the largest banks in the usa to decline in the third quarter, combined with an increase in potential loan loss reserves, the overall profits of the banks will be impacted; however, investment banking business will recover due to the interest rate cuts by the Federal Reserve.MergerTrading and profit-making transactions such as stock underwriting are gradually picking up.
This week, the US stock earnings season kicks off, with bank stocks leading the way. With the Fed rate cut, what changes will the Q3 earnings of US investment banking giants show compared to the previous year?
Analysts predict that the net interest income of US investment banking giants in the third quarter will decrease. In addition, with the increase in potential loan loss provisions, overall bank profits will be hit; however, influenced by the Fed rate cut, investment banking business will recover, and profitable transactions such as M&A deals and equity underwriting will gradually warm up.
Among the major banks, $JPMorgan (JPM.US)$Please use your Futubull account to access the feature.$Bank of America (BAC.US)$Please use your Futubull account to access the feature.$Citigroup (C.US)$Please use your Futubull account to access the feature.$Wells Fargo & Co (WFC.US)$ Highly sensitive to interest rates, greatly affected by the decrease in net interest income; $Goldman Sachs (GS.US)$Please use your Futubull account to access the feature.$Morgan Stanley (MS.US)$ The business model leans more towards investment banking, trading, and fund management, with higher revenue from investment banking operations compared to other banks, therefore it is expected that the profit in the third quarter of this year will increase.
This Friday morning, the largest bank in the USA, JPMorgan Chase, and the third-largest bank, Wells Fargo & Co., will release their third-quarter financial reports; next week, Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs will release their reports.
Net interest income is feared to reach a two-year low, with loan losses gradually increasing.
According to Bloomberg's data, investors anticipate that the overall net interest income of JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo & Co. in Q3 24 will be slightly below 62 billion US dollars, a decrease of nearly 5% from Q3 23, marking the lowest level since the end of 2022.
At the beginning of 2022, the Federal Reserve raised interest rates rapidly, leading to a significant increase in the net interest income of major banks, as deposit rates rose slower than borrowing rates. However, this prosperity began to diminish this year because before the rate cut by the Federal Reserve in September, banks gradually raised deposit rates, squeezing the space for net interest income.
In addition, due to the high interest rates suppressing loan demand, except for credit card loans, loan growth in the USA has been relatively slow this year. Analysts predict that the rate cut by the Federal Reserve can prompt households and businesses to increase debt.
It is worth noting that although the loan losses of major banks in the USA are still at very low levels, they are gradually increasing because consumers have depleted their savings during the pandemic while living costs are rising. HSBC bank analyst Martinez stated:
"The credit has been performing well and showing some resilience amidst the economic slowdown. Signs indicate that this situation is likely to continue. However, after all, these are banks, and occasional fluctuations can occur, even in good times. I believe that our complacency about credit has led us to overlook potential risks, and any fluctuation could be seen as a negative signal."
In summary, due to the decrease in net interest income and the increase in potential loan loss reserves, the overall profit of banks will be affected.
Among the major banks, jpmorgan will be most affected by the Federal Reserve's interest rate cuts and rate changes.
JPMorgan benefits the most from high interest rates among banks, with a high proportion of short-term or cash securities in its assets. These securities generate higher returns when interest rates are high, but the returns decrease after the Federal Reserve cuts interest rates. Suryansh Sharma, an analyst at Morningstar, said:
"Our view has always been that JPMorgan benefits greatly when interest rates rise, mainly due to the structure of its balance sheet. Now, with interest rates falling, JPMorgan will be at the greatest disadvantage among major banks."
Last month, a senior executive at JPMorgan warned that analysts' expectations for JPMorgan's net interest income in 2025 were too optimistic. This statement made investors uneasy, leading to a more than 5% drop in JPMorgan's stock price. Analysts reduced JPMorgan's net interest income for 2025 from $91.5 billion to $89 billion.
Similar to JPMorgan, Bank of America, Citigroup, and Wells Fargo & Co are highly sensitive to interest rates, with net interest income being a significant source of their overall revenue.
Goldman Sachs and Morgan Stanley's business models lean more towards investment banking, trading, and fund management, so they are less affected by the compression of net interest income.
Investment banking business is expected to recover.
Analysts generally expect that the investment banking business of major US banks will increase in the 23rd quarter compared to the same period last year. The average investment banking revenue of JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup is expected to increase by at least 20%, with strong expectations for new stock offerings and bonds underwriting business.
Over the past two years, the Federal Reserve has aggressively raised interest rates to curb inflation, benefiting ordinary depositors, but also making major corporations more cautious in significant decisions such as acquiring small competitors or selling parts of their business, which are core businesses for investment banks.
As the Federal Reserve begins to reverse its monetary policy, the business of investment banking will experience a revival.
Moody's rating analysts pointed out in a report that the debt and stock issuances of major banks in the third quarter are generally increasing, completed merger and acquisition transactions remained stable, and although US stock Initial Public Offerings (IPOs) are still at historic lows, they have more than doubled compared to a year ago. Therefore, the revenue of investment banks is expected to increase.
As mentioned earlier, the business models of Goldman Sachs and Morgan Stanley lean more towards investment banking, trading, and asset management, with their revenue from investment banking operations exceeding that of other banks. Therefore, after two years of downturn, their profits in the third quarter of this year are expected to increase.
Analysts expect that Goldman Sachs' Q3 profit will increase by 26% year-on-year, while Morgan Stanley's net income will increase by 12.5% year-on-year.
Seller analysts' expectations for Q3 financial reports of major US banks
As analyzed earlier, the profits of Goldman Sachs and Morgan Stanley are expected to increase in the third quarter of this year, while JPMorgan, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates, with significant impact from the decrease in net interest income.
According to FactSet's data, sell-side analysts have made expectations on the third-quarter financial reports of major banks in the USA, and compared them with the actual results of the third quarter of 2023, as follows:
Editor / jayden