JPMorgan, Bank of America lead earnings parade of U.S. largest banks to cap off tough year

By Steve Gelsi

Citigroup, Wells Fargo, Morgan Stanley and Goldman all on deck amid mostly lower profit expectations during Q4.

JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. kick off earnings this coming Friday as Wall Street's largest banks wrap up a tough year with their fourth-quarter results.

Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) follow with earnings due on Tuesday, Jan. 16, the day after the Martin Luther King Jr. holiday.

In the face of a challenging economy, the impact of lingering inflation, lofty interest rates, and a lack of deal-making in the quarter, five out of the six banks have seen their earnings estimates reduced by analysts in the past three months.

JPMorgan Chase (JPM) is the only bank to see its earnings estimates boosted during the quarter.

"It seems the big banks are feeling the squeeze on net interest income, it is having a negative effect on revenues and forward guidance in this group," said Brian Mulberry, client portfolio manager at Zacks Investment Management. "Lack of loan demand, lack of M&A activity and very little IPO business is hurting the more profitable activities of the larger banks in addition to paying out 5% to money market depositors."

While earnings expectations for the fourth quarter have mostly come down, stock prices of all the big banks rebounded during the quarter after a dismal year that saw the sector pressured by the failure of Silicon Valley Bank, Signature Bank and First Republic Bank. (See chart below)

The stocks shifted into bullish territory starting November, when Wall Street started betting that the U.S. Federal Reserve was done hiking interest rates and start cutting in 2024.

Huntington Private Bank (HBAN) Chief Investment Officer John Augustine told MarketWatch in November that bank stocks were coming more into favor amid the expectation for a positive yield curve in the second half of 2024.

David Konrad, analyst at KBW, told MarketWatch on Friday that the brokerage has buy ratings on Goldman Sachs, Morgan Stanley and Wells Fargo (WFC).

Fourth-quarter earnings expectations mostly came down for banks during the quarter because analysts figured that any big upticks in the business won't likely take place right away.

"Capital markets activity was still pretty muted," he said. "There's also higher compensation expenses for banks because they want to retain bankers in anticipation of a better 2024."

Banks are also on the hook to reimburse the Federal Deposit Insurance Corp. for the billions it spent to provide coverage for uninsured deposits at Silicon Valley Bank and other banks. These payments will take a bit out of fourth-quarter earnings.

Still, despite a lack of mergers and acquisitions as well as initial public offerings, capital markets activity surged in some areas during the fourth quarter, said Chris Marinac, analyst with Janney Montgomery Scott.

"The market saw really good months in November and December for fixed income," Marinac said. "It could be a year-end gift."

While economic storm clouds remained over the sector during the quarter, the cost of capital that banks use to fund loans fell back slightly, in another boost to the sector, Marinac said.

Also read: Deep Dive: These two bank stocks shine as the industry gets closer to turning a corner

On the public-policy front, banks were visible during the quarter as they pushed back against proposed capital requirements under the Basel III endgame regime initially introduced in the wake of the Global Financial Crisis to strengthen the international banking system.

In their annual appearance on Capitol Hill this year, chief executives at the U.S.'s largest banks including the six about to report earnings said mortgages and small loans will be more expensive under the proposed capital regulations.

Analysts boost profit estimates for JPMorgan Chase

Analysts expect JPMorgan Chase & Co. to report fourth-quarter earnings of $3.45 a share and revenue of $39.7 billion, according to Factset Consensus estimates.

The earnings view is slightly more bullish than the estimate of $3.42 a share at the start of the quarter.

Despite the headwinds in the sector, JPMorgan's larger scale and multiple lines of revenue have helped it outperform others in the space.

In a rare move by a rival bank chief executive, Morgan Stanley's James Gorman said last month that JPMorgan Chase Chief Executive Jamie Dimon is the best bank executive in the world.

Not one to mince words, Dimon said in October that, "This may be the most dangerous time the world has seen in decades" with wars in Ukraine and the Middle East and saber-rattling in Asia.

Also read: JPMorgan's Jamie Dimon sees smaller chance of a soft landing than others

One key metric Wall Street will watch for in its upcoming earnings report is JPMorgan's outlook for net interest income and net interest income excluding markets.

In October, the bank hiked its outlook for 2023 net interest income excluding markets by $2 billion to $89 billion. On Friday, it will likely provide an outlook figure for 2024.

JPMorgan's stock ended 2024 with a gain of 26.9% for the year, better than any other large bank. The S&P 500 rose about 24% in 2023.

Analysts cut Citigroup profit view as bank restructures

Citigroup (C) stands out as one of the most closely-watched banks during the fourth-quarter earnings season, because it said it plans to reveal head-count reductions and other impacts of its massive restructuring effort under Chief Executive Jane Fraser.

With all these changes underway with severance costs and other challenges, analysts have cut their fourth-quarter earnings estimates drastically.

Citigroup is now expected to earn 9 cents a share, with revenue of $18.62 billion. At the start of the quarter, analysts expected fourth-quarter earnings of $1.06 a share.

On Dec. 7, Citi Financial Chief Mark Mason said the bank expects to book about $1 billion in severance costs during the quarter - a figure that will impact its bottom line.

Citigroup's stock ended the year with a gain of 13.7%.

Bank of America earnings follow weak stock performance in 2023

Analysts currently expect Bank of America (BAC) to earn 60 cents a share on revenue of $23.87 billion, according to FactSet consensus estimates.

At the start of the quarter, Bank of America was expected to earn 74 cents a share.

During the quarter, Bank of America Chief Executive Brian Moynihan said he's seeing pent-up deal demand as cause for optimism around the bank.

He also doubled down on the bank's commitment to its net-zero-emissions efforts despite pushback in the political arena.

Overall, Wall Street has been least bullish on Bank of America's stock price compared to other big banks.

Bank of America's stock rose about 1.7% in 2023, less than its five rival megabanks.

Morgan Stanley to roll out new Chief Executive Ted Pick

Morgan Stanley Chief Executive Ted Pick officially took up the reins at the storied investment bank on Jan. 1, after a roughly 14-year tenure by James Gorman, who is currently chairman.

The fourth-quarter earnings will mark Pick's first major appearance in the job as chief executive, although he wasn't officially in charge of the bank during the last three months of 2023.

Also read: Morgan Stanley's new CEO Ted Pick has 'big shoes to fill' as he faces challenging markets, analyst says

Morgan Stanley is expected to report fourth-quarter earnings of $1.14 a share on revenue of $12.9 billion. At the start of the quarter, analysts estimated the bank would earn $1.28 a share

Tom Glocer, Morgan Stanley's independent lead director, told Reuters last month that Pick has a reputation for being disciplined and having a cool head.

Inside the bank, Pick has been credited with reducing the bank's exposure to the collapse of Archegos Capital Management in 2021, the Reuters report said.

Although Morgan Stanley lost $900 million, it avoided much steeper costs inflicted on other banks.

Morgan Stanley's stock rose about 9.7% in 2023.

Goldman, Wells Fargo profit expectations fell during the quarter

Wells Fargo is expected to earn 93 cents a share on revenue of $20.35 billion.

The company's earnings estimate stood at $1.07 a share at the start of the quarter.

Wells Fargo's stock price rose 19.2% in 2023.

For its part, Goldman Sachs is expected to earn $4.39 a share on revenue of $11.04 billion. The bank's earnings estimate has fallen more sharply than other big banks from $6.67 at the start of the quarter.

Goldman Sachs stock moved up by 12.34 in 2023.

Also read: This earnings season will be the first big test of the market's year-end rally. The forecasts don't look great.

-Steve Gelsi

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01-06-24 0737ET

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