Q2 Earnings Season: Big 6 US Banks Face Rough Waters Amid Rising Deposit Costs and Lower Expectations
July 15, 2023
The second-quarter earnings season is set to commence today with key US markets players like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) taking the lead. As it stands, earnings forecasts from analyst revisions do not predict an optimistic scenario. Out of the Big 6 US Banks, just one has seen its Q1 earnings consensus estimate grow in the last six months. Goldman (GS), on the other hand, is forecasted to deliver its lowest quarterly earnings in years due to steeply slashed Q2 earnings estimates. This sentiment is also echoed for Morgan Stanley (MS).
Economic Pressures and the Federal Reserve’s Influence
The muted expectations for bank earnings largely stem from the rising deposit costs, a result of the Federal Reserve continuing its path of interest rate hikes, although at a decelerated pace. Ken Usdin of Jefferies predicts an impact on funding costs due to deposit mix changes and intense competition. Additionally, provisions for bad credit are anticipated to surge. “Q2 will likely mirror Q1 in terms of deposit betas and non-interest bearing deposit outflows influencing stock performance,” added Morgan Stanley analyst Betsy Graseck.
A Silver Lining: The Role of Credit
Credit, with the exception of subprime consumer, seems to be the only optimistic aspect. However, according to Graseck, it’s a “double-edged sword“. While strong credit health is good news, it also implies a need for even higher rates which may escalate the pressure on deposit betas and non-interest bearing outflows. Kenneth Leon of CFRA foresees increasing credit risks for personal loans and credit card balances on both a quarter-on-quarter and year-on-year basis.
Market Insights and Earnings Forecasts
As per SA analyst Logan Kane’s assessment, JPMorgan appears to be the most promising prospect currently, potentially emerging as the top performer amidst the spring bank panic. Juxtaposed Ideas holds a bullish view on Citigroup, attributing their optimism to the bank’s diversified portfolio and consistent efforts to enhance operational efficiency. Wells Fargo, however, according to Labutes IR, is unlikely to see significant improvement in its Q2 performance due to weak fundamentals and other persisting issues.