Earnings Outlook: Bank earnings await after a weak quarter for stock prices, but the biggest names remain more favored

Among the group, Citibank’s stock fell the most in the third quarter, with a loss of 10.7%. At the same time, its earnings target among Wall Street analysts has only fallen by 6%.

While stock prices and analyst earnings expectation changes aren’t directly correlated, the current dynamic reflects the bearish sentiment toward banks all year including in recent days, on a host of worries.

Clouds hanging over the sector include increased capital requirements to meet regulatory guidelines and concerns over higher bond yields impacting the prices of debt and other securities on bank balance sheets.

Also read: Why bank stocks are the ‘Achilles’ heel’ of markets as bears worry high bond yields may ‘break’ something

Other worries include potential drops in net interest income, which is the profit banks make on loans compared to what they pay out in interest for deposits.

Banks are also facing jitters over commercial real estate as office workers stay at home and demand for workspace dwindles.

Meanwhile, banks are also adding to their reserves in anticipation of an economic downturn in a move that channels money away from their quarterly bottom lines.

Also read: Bank stocks outpace broad market into the red as higher bond yields impact the value of their portfolios

Larger banks have fared better in the current environment than their smaller peers, however.

With exposure to more revenue streams, such as credit cards, the megabanks should remain healthier than their weak stock prices of late would suggest, said Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds a position in JPMorgan Chase.

“Bigger is better in this earnings season,” Mulberry said. “Banks that are big enough to have diversified businesses seem to be doing well.”

Of the six megabanks, Wells Fargo and JPMorgan Chase have seen their earnings estimates from Wall Street analysts increase during the quarter, according to FactSet data. Expectations for Bank of America have remained about flat and estimates have fallen for Citigroup, Goldman Sachs and Morgan Stanley.

Higher interest rates and a spike in bond price yields this week have weighed heavily on bank stocks and pressured the profits they make on loans compared to what they spend to maintain deposits in the form of interest payments.

A spike in bond prices in recent days on fresh uncertainties on the geopolitical front took a bite out of bank stocks earlier this week, but was then countered by a stronger-than-expected September jobs report on Friday, which sparked some gains in the sector.

While deal-making potentially bottomed in the second quarter or early in the third quarter, it didn’t take off significantly in recent months either.

This will weigh on earnings in the investment-banking sector, which includes advising on mergers and acquisitions, raising capital for corporate customers and underwriting initial public offerings, among other deal types.

“The third quarter was another weak quarter for dealmaking in the U.S. as the threat of further rate rises persisted and we saw the usual summer slowdown in the months of July and August,” Phil Isom, global head of M&A and KPMG, said in a statement.

Meanwhile, bank stocks look cheap at the moment. Financial stocks are currently trading at 87% of their 10-year average price-to-earnings ratio, according to data compiled by MarketWatch Deep Dive columnist Philip van Doorn.

Also read: Here’s what to expect when banks report earnings, and how cheap their stocks are now

Bank analyst Vivek Juneja of J.P. Morgan Chase said the sharp rise in long-term interest rates and rising bond yields to 5% has stoked bank jitters, which he described as overdone.

“We do not expect deposit outflows or liquidity concerns at our banks — they did not see deposit pressure in March, many saw inflows and liquidity has increased at large banks where liquidity was relatively lower in March,” he said.

JPMorgan Chase earnings follow outperformance by its stock

As the largest U.S. bank by market capitalization, JPMorgan’s stock held up well in the third quarter, with a slim loss of 0.3% between July 1 and Sept. 30.

Wall Street analysts expect JPMorgan Chase to earn a third-quarter profit of $3.90 a share on revenue of $39.55 billion, according to FactSet consensus data.

Analysts have also become more bullish on the bank’s prospects during the quarter. JPMorgan was expected to earn $3.53 a share back on July 1, and now that estimate has climbed by 37 cents a share.

As one of the most visible chief executives in the U.S., JPMorgan’s Jamie Dimon remained as visible as ever with a series of interviews and public appearances in which he flagged geopolitical uncertainty and other challenges in the current economy.

In an interview last month, Dimon said the worst case would be 7% interest rates with stagflation.

“If they are going to have lower volumes and higher rates, there will be stress in the system,” Dimon said. “We urge our clients to be prepared for that kind of stress.”

KBW analyst Christopher McGratty said Thursday in a research note he recommends an overweight position in JPMorgan Chase.

“We like JPM heading into the quarter due to expectations of increased market share in banking and higher-than-expected net interest income for 2023,” he said.

Analysts hike profit view for Wells Fargo

Wells Fargo stock fell 4.3% during the third quarter, even as analysts hiked their third-quarter earnings outlook to the current level of $1.23 a share from $1.18 a share.

Analysts are expecting Wells Fargo to post $21.11 billion in revenue.

The bank has continued to make progress on the regulatory front.

In August, it agreed to pay Wells Fargo agreed to pay $35 million to settle charges it didn’t provide promised broker fee discounts to clients.

Citigroup earnings come amid restructuring efforts

Citigroup is on tap to report earnings of $1.24 a share, down from the forecast of $1.32 a share three months ago.

Analysts are looking for the bank to report third-quarter revenue of $19.22 billion.

Citigroup chief executive Jane Fraser has been leading a restructuring at the bank, as it sheds its overseas consumer banking units and consolidates its senior leadership.

The bank is not likely to share any head-count reduction numbers until early next year, but it’ll likely provide a bit of color on the effort and how its businesses are faring in the choppy environment.

Bank of America earnings expectations remain about flat

Bank of America is expected to post third-quarter earnings of 81 cents a share, down only slightly from the forecast of 83 cents a share at the start of the quarter.

Analysts are looking for the bank to post third-quarter revenue of $25.15 billion for Bank of America.

Caught up in the bearish sentiment in the sector, Bank of America stock dropped 4.6% during the third quarter.

Goldman Sachs earnings in spotlight amid noise around chief executive

Goldman Sachs held the distinction as the only megabank with a positive performance in the third quarter, with a slim 0.3% gain.

Analysts currently expect the investment banking giant to earn $6.26 a share, down from $7.64 a share at the start of the quarter.

They expect the bank to report third-quarter revenue of $11.4 billion.

Goldman Sachs chief executive David Solomon has been under scrutiny after disclosing losses in its consumer banking unit and drawing criticism from within its ranks.

No doubt the bank’s quarterly profit will draw close attention from Wall Street for hints about how Solomon is doing.

Morgan Stanley earnings forecast to dip slightly

Morgan Stanley’s stock price fell 4.4% in the third quarter, while analyst earnings forecast resisted any steep drops.

At last check, Morgan Stanley is expected to earn $1.36 a share, down from $1.56 a share at the start of the quarter, according to estimates compiled by FactSet.

The bank is expected to report third-quarter revenue of $13.33 billion.

While Morgan Stanley’s earnings estimates have come down, the change has been less pronounced than its rival investment bank Goldman Sachs, partly due to the health of its wealth management business.

The bank may also provide some clues on its pending leadership transition, with no successor yet formally named for chief executive James Gorman, who is retiring by May of 2024.

Better times ahead for banks, possibly

While the market continues to absorb the notion that interest rates may stay higher for longer, some industry players remain optimistic that any recession will be mild and that economic activity will pick up.

KPMG’s Isom said he’s seeing signs of improvement in deal-making.

“We are seeing a narrowing of the gap between seller and buyer valuation expectations and deals are being made for quality assets, although with the higher rates, private equity has been sitting on the sidelines, with corporate buyers taking the lead,” Isom said.

Brian Mulberry of Zacks Investment Management said he’s expecting a bank earnings recovery in earnings within the next 12 to 18 months despite some “very negative sentiment” in the market.

Also read: September jobs report sets stage for regional-bank-stock underperfomance as yields resume run-up