JPMorgan, Wells Fargo, Citi first-quarter profit expected to be flat as interest rates rise and loan activity lags

By Steve Gelsi

First quarter saw a revival in initial public offerings and M&A, but expectations for interest-rate cuts have faded

JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. have all drawn downward revisions to their first-quarter profit estimates from Wall Street analysts as they prepare to update investors with their latest results in a week.

A small drop in loan activity may take a bite out of profits, while a rise in interest rates may impact net interest income for banks, as they pay out more money to deposit holders.

Higher interest rates also push down the value of banks' debt securities, which may also weigh.

JPMorgan Chase (JPM), Wells Fargo & Co. (WFC) and Citigroup (C) all report their profits this coming Friday, while Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) follow with their results on April 16.

The environment for the big banks remains no less complex than it has been in the past year, with both positive and negative factors to consider.

While the latest jobs report shows signs of robust economic activity in the U.S. that will benefit banks, expectations for interest-rate cuts that fueled a rally in bank stocks earlier this year have now dimmed.

Bank stocks got a jolt in November and early in 2023 when the Fed signaled it was done hiking rates and that it would potentially cut rates a few times in 2024.

Since then, the economy has not cooled significantly, inflation has remained high and bank stock investors have been pondering the effect of higher-for-longer interest rates on net-interest income.

Added to the mix is geopolitical uncertainty and jitters around exposure to office real-estate loans, which have been under pressure as workers stay at home.

While the success of the Reddit Inc. (RDDT) IPO helped fuel dealmaking around new issues and M&A transactions have continued to pick up, analysts have trimmed their first-quarter earnings estimates for the big banks since the end of 2023.

"I feel the change in earnings expectations are related to (1) slower loan growth and the 0.7% drop in loans on the Fed H8 weekly release [in the first quarter]," said Chris Marinac, analyst with Janney Montgomery Scott, referring to Federal Reserve data.

Marinac also cited a roughly 0.37% average increase on two-year, three-year and five-year Treasury rates during the quarter, which tie back to how banks lend. The higher interest rates also make the value of debt securities on bank balance sheets go down, because bond prices and yields move in opposite directions.

Marinac said all of this adds up to flatness in bank earnings when weighed against the previous quarter.

Fee income is expected to be stable or up from the previous quarter, but up only modestly from the year-ago period, he said.

Bank expenses will likely climb from the previous quarter since banks pay out bonuses, even as lenders continue to cut branches and "harvest efficiencies from technology everywhere in their organizations" that will keep costs in check, Marinac said.

Overall, banks remain cautious on new lending as they must retain more capital for an expected change in balance-sheet requirements under the Basel III endgame proposals, Marinac said.

Meanwhile, New York Community Bancorp (NYCB) sent shock waves across the banking sector in late February and March after it disclosed stress in two commercial real-estate loans.

The situation prompted S&P to issue a negative outlook on five U.S. regional banks due to higher office vacancies as well as an increasing number of loan maturities on the horizon.

With their diversified businesses, the big banks have been seen as a haven from jitters around regional banks, despite some exposure to office real state, as S&P noted recently.

Also read: Nine largest U.S. banks can handle their 'problematic' exposure to office real estate, S&P says

JPMorgan Chase net interest income in focus

JPMorgan Chase leads the pack as the largest of all U.S. banks.

The bank has been lifting its outlook for net interest income (NII) in recent quarters, and its guidance on this front may be seen as a key indicator for the banking sector as a whole.

KBW analyst Chris McGratty said JPMorgan's update "will be one of the most important earnings reports this quarter given high expectations for this over-owned stock, in our view."

McGratty said he expects the bank to boost its 2024 net interest income forecast to $91.1 billion from $90 billion, while the analyst consensus estimate is $90.7 billion.

During the quarter, JPMorgan Chase said it has reviewed loans in the multi-family housing market in New York City, which has been under pressure due to rent-control laws that kept property values from increasing.

Also read: After NY Community Bank's woes, JPMorgan Chase did a 'deep dive' into its own multifamily-loan exposure

Analysts currently expect JPMorgan Chase to earn $4.17 a share on revenue of $41.67 billion, according to FactSet data on Monday. The latest estimate is higher than the $4.14 a share projection for the first quarter at the end of 2023, but less than the estimate of $4.28 a share in February.

Wells Fargo Q1 profit estimate remains about flat

Wells Fargo & Co is expected to earn $1.06 a share on revenue of $20.19 billion.

Analysts have kept their estimate about flat, down a 2 cents a share from the start of the quarter.

The bank's regulatory problems continue to loom.

In February, Wells Fargo confirmed it satisfied requirements by federal regulators to overhaul aspects of its operations related to the fake bank accounts scandal, but the company still faces other pending actions.

Citi's restructuring effort continues

Analysts currently estimate a profit of $1.20 a share for Citigroup on revenue of $20.39 billion.

Profit estimates at the end of the first quarter fell from the projection of $1.58 a share at the end of 2023, according to FactSet data.

The bank may post a noisy quarter with restructuring costs related to its effort to streamline the bank.

Also read: Citi's Jane Fraser tells employees to 'believe' while suggesting more job cuts

Goldman, Morgan Stanley may be boosted by dealmaking

Goldman Sachs and Morgan Stanley may be poised to benefit from an uptick in initial public offerings and M&A with their large investment banking business.

Analysts currently expect Goldman Sachs to earn $8.71 a share on revenue of $12.94 billion. Three months ago, analysts had expected first-quarter earnings of $9.18 a share for Goldman Sachs.

Morgan Stanley is estimated to report earnings of $1.67 a share on revenue of $14.38 billion.

The bank's first-quarter earnings estimate has come down by about a nickel from $1.72 a share at the end of 2023.

Bank of America's balance sheet may be in focus

Analysts are currently estimating first-quarter earnings of 76 cents a share on revenue of $25.49 billion.

The bank's first-quarter earnings estimate was 79 cents a share at the end of 2023 and has only come down by 2 cents a share since then.

Bank of America's unrealized losses on its held-to-maturity assets may be a focus this quarter, since it's now increased to about $110 billion in the first quarter from $98 billion in the fourth quarter, according to a Barron's report.

Also read: Bank of America's paper loss on its bond portfolio reaches $110 bln and outpaces other banks: report

One question hanging over Wall Street is whether JPMorgan Chase, Wells Fargo & Co. and Citigroup will provide investors with more reason to buy their stocks after rewarding them with healthy gains in recent months.

At last check, JPMorgan Chase's stock has risen by 16.6% in 2024, Citigroup is up by 20.6% and Wells Fargo has gained 17.5%.

Those advances have outpaced the 3.3% year-to-date rise by the Dow Jones Industrial Average DJIA, the 9.2% gain by the S&P 500 SPX and the 11.2% rise by the Financial Select Sector SPDR ETF XLF.

-Steve Gelsi

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04-08-24 1356ET

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