As earnings season arrives, the market's focus is on the upcoming third-quarter earnings reports from JPMorgan Chase (NYSE: JPM) and Wells Fargo, scheduled for release on Friday. The recent strength in U.S. employment data has introduced uncertainty to the Federal Reserve's future interest rate cut path, prompting investors to closely monitor the net interest income (NII) performance of these banks. It is expected that these banks will face a decline in profits, primarily due to reduced interest income and continued weak loan demand.
Previously, banks benefited from the Federal Reserve's rate hike policy, with a significant increase in NII. However, with the changing economic landscape, this advantage is diminishing. Stephen Biggar, a banking analyst at Argus Research, noted that weak loan growth, increased margin pressure, and higher loan loss reserves due to rising unemployment are anticipated to squeeze bank profits, leading to a moderate decline in NII.
Betsy Graseck of Morgan Stanley predicts in her report that by mid-2025, the Federal Reserve may cut interest rates by another 150 basis points, with the U.S. economy likely to avoid a recession. Despite short-term challenges, investors' focus will gradually shift to future economic prospects.
Meanwhile, Moody's analysts believe that although increased market volatility may slightly boost banks' trading departments, the impact of seasonal slowdown has lowered income expectations for these segments compared to the previous quarter. Weak office building loans remain a long-term challenge for the banking industry. However, many banks have built sufficient reserves to address potential credit losses. Industry executives have noted that following last year's banking crisis, stronger lending underwriting standards have stabilized loan delinquency rates.
For the expectations of the six major U.S. banks, JPMorgan's earnings per share (EPS) is expected to decrease by 8% from $4.33 to $4.00, mainly due to a reduction in NII compared to the second quarter. HSBC analyst Saul Martinez expects JPMorgan's NII to decline by 1.2% due to a narrower margin and stagnant loan growth.
Expectations are also less optimistic for Wells Fargo and Bank of America. Bank of America's EPS is projected to drop 14% from $0.90 to $0.77, while Citigroup's EPS is expected to fall 20% from $1.63 to $1.30. Wells Fargo's EPS is forecasted to decrease 14% from $1.48 to $1.28.
In contrast, Goldman Sachs is anticipated to be a highlight, with its EPS expected to significantly rise by 35% from $5.47 to $7.36, benefiting from improvements in its investment banking business. However, as CEO David Solomon warned last month, its trading revenue could decrease by 10%. Morgan Stanley's EPS is expected to grow 14% from $1.38 to $1.58, with earnings to be reported on October 16.
As the banking industry's third-quarter earnings reports are released, the market will closely watch the impact of changes in interest rate trends on banks' performance and how banks navigate the rapidly changing economic environment.
