(Bloomberg) -- Big bank investors parsing through the industry’s third-quarter results this week will face something they haven’t grappled with in nearly a half-decade: the impact of Federal Reserve rate cuts.
JPMorgan Chase & Co. and Wells Fargo & Co. kick off the first bank earnings season since the Federal Reserve’s 50 basis point rate cut last month. All eyes will be on their forecasts for full-year net interest income — the difference between what a bank collects on loans and pays out to depositors and their biggest revenue source — and any hints of what that metric will deliver in 2025.
The largest US lenders have benefited for years from rising interest rates, which helped the four biggest banks post record net interest income last year. But for months, their leaders have warned that party may be coming to an end, with JPMorgan President Daniel Pinto telling analysts in September that they were being too optimistic in their NII projections for next year. Chief Executive Officer Jamie Dimon has long cautioned shareholders that the firm is “over-earning” amid tailwinds that wouldn’t last forever.
For now, analysts expect the four largest banks to post almost $62 billion of net interest income in the third quarter, compared to $64 billion for the same period last year. Wells Fargo could have the sharpest drop with analysts predicting a 9% decline. At Citigroup Inc., it may fall by almost 4% and drop about 3% at Bank of America Corp. JPMorgan’s NII will also dip ever-so slightly, by less than 1%, according to the analyst predictions compiled by Bloomberg.
There’s a “lingering” near-term anxiety among investors over the revenue source in the shorter term — even if further rate cuts next year fire up borrowing by consumers and corporations, Piper Sandler’s R. Scott Siefers wrote in a note. Still, any reductions in NII expectations outlined by banks for this year at least will likely be small, as falling deposit costs help counter tepid loan growth, he said.
“The fear is that lower rates could mean a step back before we march forward,” Siefers said. “We definitely sense some nervousness regarding NII trends” in the second half, he said.
Ultimately, the new era of rate cuts should offer banks a boost down the road as they start to fuel more economic activity. That may also help hasten the end of a protracted deal slump as companies seize on the cheaper financing to fund mergers.
“Lower rates should be stimulative for economic growth, loan demand, and M&A and other IB activity,” Jim Mitchell of Seaport Research Partners wrote. “These factors should also result in lower credit risk — better economy, lower borrowing costs — as well as potentially driving improved deposit growth — mix,” he wrote.
Still, it may take time for this story to play out, according to Mitchell. And some banks have already tempered expectations on the investment banking front. Bank of America CEO Brian Moynihan said last month that revenue from that business will be about $1.2 billion in the third quarter, roughly flat compared to the same period last year.
Citigroup Chief Financial Officer Mark Mason said in September that investment-banking fees for the third quarter will probably be up about 20% compared to the previous year — which is below the average estimate among analysts in a Bloomberg survey.
At JPMorgan, investment banking fees are expected to jump almost 18% to just over $2 billion compared to the prior year, fueled by about a 40% increase in equity underwriting fees. Still, that haul remains well below the bank’s tally of more than $3.5 billion during the covid peak.
“We’re on the cusp of a pickup in investment banking,” said Evercore ISI analyst Glenn Schorr. “We’re seeing activity percolate and think there are real reasons for optimism.”
When it comes to trading, the revenue tally for the third quarter for Morgan Stanley, Goldman Sachs, Bank of America, JPMorgan and Citigroup is expected to drop slightly — with the biggest decline at Goldman Sachs. The bank already signaled a note of caution to investors in September, when Chief Executive Officer David Solomon said the firm’s trading unit was on track to drop 10% from the prior year.
Questions on credit quality will also be high on the list, with analysts anticipating slower increases in credit losses helped by a robust economy. Capital rules will also be key as investors seek banks’ reactions to the Fed’s revamped proposals known as Basel III Endgame.
Those changes would roughly slice in half the 19% capital hike proposed by US regulators last year. With the expectation of smaller capital hikes, banks may go on the offensive with share buybacks and dividends.
“More color on excess capital distribution plans might come, although most banks likely wait until the Basel Endgame reproposal is released,” Morgan Stanley analyst Betsy Graseck said in a note.
--With assistance from Hannah Levitt.
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