The earnings season kicks off tomorrow led by some major banks. J.P. Morgan, Citigroup and Wells Fargo are also scheduled to release tomorrow
- J.P. Morgan is expected to announce earnings of $3.96 on the $39.15 billion of revenues
- Citigroup is expected to announce earnings of $1.37 on $19.59 billion revenue
- Wells Fargo is expected to announce earnings of $1.18 on $20.15 billion of revenue.
J.P. Morgan shares are up around 11% this year while both Citigroup and Wells Fargo are each about 5.35%. The larger money center banks escaped the deposit which role scenario that forced the smaller regional banks to come under pressure. The earnings are also under pressure as they have to pay higher for deposits in order to keep the deposit base high enough to fund their assets.
The Wall Street Journal has an interesting article in today’s issue where they ask “Is the banking crisis over? We are about to find out.”
In the article, they point out that the banking industry is preparing to unveil the impacts of this year’s banking crisis as they report their second-quarter earnings, with predictions indicate a 7% drop from the previous year.
They argue that the larger institutions, including JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, Bank of America, and Goldman Sachs, are anticipated to exhibit robust results, despite the challenging conditions. However, smaller banks could experience significant strain due to these economic upheavals.
A key challenge for the smaller banks is the increased cost of deposits, a result of competing with high-yielding money-market funds. Some banks have pivoted to brokered deposits, which come at a higher cost and are sourced through third parties. Interest rate hikes in the second quarter have further complicated the situation, depreciating the value of low-rate securities and loans held by banks. This trend is pushing banks towards large unrealized losses, thereby posing threats to their profitability.
As potential loan defaults loom, particularly in commercial real estate portfolios, banks are expected to ramp up their reserves. Large banks hold significant real-estate portfolios, including loans for office buildings that are experiencing slow recovery rates. Yet, their sector diversification may shield them from the level of risk smaller, more concentrated banks are facing.
Share prices of the six major U.S. banks are lagging behind the strong rebound of the S&P 500.
Investors and analysts are expressing concern about the banking stocks, due to apprehensions around potential souring of more loans in the event of a U.S. recession. The introduction of new capital rules also threatens to impose further costs on these large banks.
Consequently, smaller banks, especially those perceived to be weaker, are particularly susceptible to share price volatility, and the earnings may expose them as the earning season progresses and the smaller banks start to report.