TFC - Bank Q2 earnings set to kick off with the bar set low as rates stay high

2023-07-13 15:36:00 ET

Banks start releasing Q2 2023 earnings on Friday, leading off with JPMorgan Chase ( NYSE: JPM ), Citigroup ( NYSE: C ), and Wells Fargo ( NYSE: WFC ). For the most part, Q2 earnings expectations have been lowered for the biggest banks.

Analyst earnings revisions don't paint a pretty picture. Only one of the Big 6 U.S. Banks saw its Q1 earnings consensus estimate rise over the past six months — JPMorgan Chase ( JPM ). Analysts have cut their Q2 earnings estimates the most for Goldman ( NYSE: GS ) and Morgan Stanley ( NYSE: MS ), which are skewed to Wall Street activity, as seen in the table below.

Asset manager BlackRock ( NYSE: BLK ) also reports Q2 results on Friday, presenting a view into that part of the financial industry. KBW analyst Michael Brown gives the firm high grades for its diversification, consistent organic growth, and profitability. The company is expected to earn $8.42 per share , on an adjusted basis, in Q2, up from $7.93 in Q1 2023 and $7.36 in Q2 2022.

For the big bank earnings, Goldman ( GS ) is expected to post its worst quarterly earnings in years, according to media reports. Return on equity is expected to drop to the low single digits (from 11.6% in Q1 2023), and writedowns are expected to exceed $2B due to its GreenSky business, which it's trying to sell, and commercial real estate holdings, Semafor reported on Thursday.

Rate repercussions: Part of the reason for the lower expectations for bank earnings is that deposit costs are continuing to rise as the Fed's interest rate-hiking path continues, albeit at a slower pace. While higher rates benefit a bank's net interest income, they also increase deposit costs and weigh on investment banking and trading activity.

Overall, banks face numerous uncertainties, including negative net interest income/EPS revisions, normalization of credit, and finalization of regulatory rules, said Jefferies analyst Ken Usdin in a note to clients. Deposit mix shifts and elevated competition are expected to weigh on funding costs, and reserves for bad credit are expected to increase.

"Expect 2Q23 to be similar to 1Q23 with deposit betas and non-interest bearing deposit outflows driving stock performance," wrote Morgan Stanley analyst Betsey Graseck. She sees loan growth decelerating and banks to guide down more.

Credit focus: The one bright spot is credit, excluding subprime consumer, she added. Total net charge-offs are expected to rise a median 6 basis points in Q2, a modest increase from Q1's 33 bps. "It's a double-edged sword because the good news is credit is good, but the bad news is that this could mean rates need to go even higher, which will likely put more pressure on deposit betas and NIB (non-interest bearing) outflow."

CFRA analyst Kenneth Leon sees rising credit risks for personal loans and credit card balances, both Q/Q and Y/Y. "We believe consumer loan loss reserves are reverting higher, but only to the historic averages back in 2019, not elevated levels," he said in a recent note to clients.

He sees rising rates driving NII higher, but "moderate gains in loan volume and higher deposit costs on interest-bearing liabilities may narrow net yields on interest-earning assets." Noninterest income is likely to deliver mixed results.

Company-specific: JPMorgan Chase ( JPM ) and Wells Fargo ( WFC ) are poised to deliver rising Q2 revenue on a Y/Y basis, he said, while Bank of America ( NYSE: BAC ), Citigroup ( C ), Goldman Sachs ( GS ), and Morgan Stanley ( MS ) are expected to see flat to declining revenue.

For earnings, Bank of America ( BAC ), JPM and WFC have the best chance to produce Y/Y growth, "but this will be harder for C with recent asset sales," Leon said. For GS and MS, Q2 is likely to mark the bottom of the investment banking cycle.

Wolfe Research analyst Steven Chubak sees JPMorgan ( JPM ) the most likely to surprise on the upside on net interest income, while BofA ( BAC ) could exceed expectations on capital markets. Morgan Stanley ( MS ), Citi ( C ), and Goldman ( GS ) are the most likely to disappoint on investment banking/trading, expenses, and one-time impairments.

Indeed, Odeon analyst Dick Bove upgraded Goldman Sachs ( GS ) to Buy on Thursday, noting that rising equity values have revived activity in equity offerings and M&A, part of GS's core business.

Track records for the Big 6 Banks:

Bank of America ( BAC ), reporting on Tuesday, July 18, has surprised to the upside in all but one of the past 12 quarters, last missing in Q2 2022. For revenue, it has missed five times in the past three years.

Citigroup ( C ) reports on Friday, July 14. It has beat EPS consensus estimates in all but two of the last 12 quarters, the most recent miss being in Q4 2022. Revenue, though, has beat in all but one quarter during that same period, having missed only in Q4 2022.

Goldman Sachs ( GS ), scheduled to post on Wednesday, July 19, has missed the average analyst EPS estimate twice in the last 12 quarters, with the most recent miss in Q4 2022. Revenue-wise, it fell short in the past two quarters, but beat in the previous 10.

JPMorgan Chase ( JPM ), due to report earnings Friday, July 14, has trailed the EPS consensus estimate three times in the past 12 quarters, most recently in Q2 2022. Revenue has missed only twice during that period, missing in Q2 2022 and Q4 2021.

Morgan Stanley ( MS ), expected to report on Tuesday, July 18, has only fallen short of the EPS consensus estimate once in the previous 12 quarters, in Q2 2022. Revenue, though, has disappointed in three quarters, Q3 2022, Q2 2022, and Q4 2021.

Wells Fargo ( WFC ), due to post on Friday, July 14, has trailed the EPS consensus estimate in only one quarte r —  Q2 2020 — in the past three years. Revenue has a less stellar track record, missing in five quarters, with the most recent being Q4 2022.

Bank Previews from SA Analysts:

• Wells Fargo Q2 2023 Earnings Preview: What to Watch
• For 'They Never Lose': J.P. Morgan Is Victorious in the 2023 Bank Crisis
• JPMorgan Earnings Preview: The P/E Has Compressed as Earnings Build
• Bank Earnings and What They Mean

Financial earnings calendar for next two weeks:

Friday, July 14: BlackRock ( BLK ), JPMorgan ( JPM ), Citi ( C ), Wells Fargo ( WFC ), State Street ( STT )

Monday, July 17: Interactive Brokers Group ( IBKR ), Wintrust Financial ( WTFC ), PacWest Bancorp ( PACW )

Tuesday, July 18: Bank of America ( BAC ), Morgan Stanley ( MS ), Charles Schwab ( SCHW ), PNC Financial ( PNC ), Bank of New York Mellon ( BK ), Synchrony Financial ( SYF ), Western Alliance Bancorporations ( WAL ), Hancock Whitney ( HWC )

Wednesday, July 19: Goldman Sachs ( GS ), U.S. Bancorp ( USB ), Discover ( DFS ), Nasdaq ( NDAQ ), M&T Bank ( MTB ), Northern Trust ( NTRS ), Citizens Financial ( CFG ), MarketAxess ( MKTX ), Ally Financial ( ALLY ), First Horizon ( FHN ), Zions Bancorporation ( ZION )

Thursday, July 20: Marsh & McLennan ( MMC ), Truist Financial ( TFC ), Capital One ( COF ), Travelers ( TRV ), Fifth Third Bancorp ( FITB ), Webster Financial ( WBS ), Bank OZK ( OZK )

Friday, July 21: American Express ( AXP ), Regions Financial ( RF ), Huntington Bancshares ( HBAN )

For further details see: