Upcoming Q2 2023 bank earnings: How bad will it be?

  • Q2 2023 financial results are just around the corner. Upcoming results will provide a clearer picture of the lasting effects of the banking crisis and persistent Fed rate hikes.
  • Banks are in a tight spot to generate earnings from making loans – in fact, loan losses may negatively impact bank earnings this quarter.

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Upcoming Q2 2023 bank earnings: How bad will it be?

A number of financial results are expected to pour in as the week draws to a close. 

Stepping into the week, investors are keeping close tabs on the second-quarter earnings results of Wall Street banks including JPMorgan Chase, Wells Fargo, and Citi. Earnings by Goldman Sachs, Morgan Stanley, and Bank of America will follow next week.

Recapping Q1: What worked, what didn’t

The big banks did better than expected in the first quarter of 2023 compared to the last quarter of last year which saw inflation at its highest level since the early 1980s

In the first quarter, the Wall Street banks benefited from the Federal Reserve's decision to raise interest rates as part of its monetary policy tightening to slow the economy and bring inflation down. While lending took a hit during the March banking crisis, big banks apparently benefitted from the turmoil amid the regional banking sector caused by the fallout of SVB, Signature Bank, and First Republic Bank. They experienced an increase in commercial account opening activity and deposit inflows instantly after SVB’s collapse, which was reflected in their first-quarter earnings. 

JPMorgan’s net revenue jumped 25% from the same period last year to $39.34 billion in Q1 2023. Wells Fargo saw its net revenue rise 17% to $20.73 billion in Q1 2023. And Citigroup reported net revenue of $21.45 billion, with a 12% increase y-o-y in the first quarter of 2023.

Upcoming results of the subsequent quarter will provide a clearer picture of the lasting effects of the banking crisis and persistent Fed rate hikes. The Fed skipped its rate hike in June on recent reports showing inflation moving steadily downhill – but rates could still go higher if inflation continues to be sticky, the Fed signaled.

Trouble in banking paradise: Q2 will see a significant jump in loan losses

Banks have been riding high on rising demand for loans and higher revenue from loan products during the first half of this year. However, the Fed's sustained interest rate hikes fueled a tougher economic climate dampening the appetite for consumers to borrow. As a result of the worsening economic outlook, loan demand from retail and business customers bounced back in the second quarter.

As higher interest rates make borrowing more expensive, conditions also remain tough when it comes to bank customers repaying loans. This puts banks in a tight spot to generate earnings from their core business of making loans – in fact, loan losses may negatively impact bank earnings in the overall scheme of things. Keeping this in mind, the upcoming results will likely see an uptick in delinquencies and defaults. In the same vein, the six biggest U.S. banks are expected to have set aside nearly $5 billion to cover loan losses in the second quarter of this year, up from $1.98 billion in the first quarter. 

JPMorgan is expected to book around $2.5 billion of provisions in the second quarter, more than double what it put aside the year before. Bank of America and Wells Fargo are expected to book more than twice the amount of provisions compared to last year, while Citigroup is predicted to book over 50%.

The double-edged sword of high interest rates

While rising interest rates have been a significant factor in driving higher incomes for banks like JPMorgan, persistent hikes in rates can give rise to liquidity challenges as well, like what led to SVB’s demise. 

Tables have turned for banks in the second quarter as high-yield savings accounts have returned to center stage. Consumers are increasingly looking to park money in accounts to capitalize on high rates. Although banks have begun raising rates more than what they have historically offered, consumers have been lured in by fintechs and big techs' more competitive rates this time. 

Apple’s foray into financial services began with the launch of the Apple Card savings account in April 2023 in partnership with Goldman Sachs. It was reported that Apple attracted almost $990 million in deposits over its first four days and 240,000 accounts in less than a week after its launch. While this figure is nowhere close to the deposits big banks hold, it serves as a reminder to traditional banks that they may face competition in retaining deposits, customer relationships, and profits down the line.

“Absolutely. Anybody competing for deposits and offering payment capabilities is a threat to banks – big or small,” answered Ron Shevlin, Chief Research Officer at Cornerstone Advisors, when asked if Apple is a threat to incumbent financial institutions.

Analysts suggest that paying more for deposits is an effective way for banks to keep customers loyal. However, amid a slew of bank failures, a potential credit crunch, and the debt ceiling deal shaking up the market stability, banks seem a long way off from offering sufficiently higher yields on deposits that resonate with hungry consumers.

What does it mean for the stock?

A chart showing upcoming earnings and their estimated Earnings Per Share

Upcoming July 14 earnings, Source: I/B/E/S data from Refinitiv

A consensus estimate of Adjusted Earnings Per Share (EPS) indicates a mixed bag in Q2. Shares of Wells Fargo and JPMorgan Chase may take the lead, with a y-o-y growth of 44% and 43.9%, according to analysts at Refinitiv. They expect Bank of America's EPS to increase more than 7%, while Goldman Sachs, Citigroup, and Morgan Stanley may see sharp declines in their EPS falling behind their peers with a 59%, 39.1%, and 9% respective expected drop. 

Morgan Stanley and Goldman Sachs are more focused on trading, M&A, investment banking, and wealth management – all of which are grappling with macroeconomic conditions. However, the wealth and investment management divisions of Morgan Stanley are likely more resilient due to multiple acquisitions of fee-based asset managers, which makes the case why it is estimated to incur a lighter decline in earnings and EPS compared to Goldman Sachs.

“With second-quarter earnings beginning this week, ‘better than feared’ likely isn’t going to cut it anymore,” said Michael Wilson, analyst at Morgan Stanley. Higher interest rates and dwindling liquidity suggest stock valuations are vulnerable unless companies boost forecasts, he added.

The good news is that the Federal Reserve Board recently released results of the annual bank stress test, which illustrates that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during an economically challenging time. 

At the same time, the Fed flashed a warning that clearing the stress test doesn’t translate to a bright green light for banks at large – as has been the case in the past. The regulator further dropped hints that big banks will face increased scrutiny, regulations, and capital requirements as part of tighter international standards in view of failures. The Fed’s banking regulator, Michael Barr, also wants more standardization in risk assessments among big banks, instead of counting on their own estimates.

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