What to Watch in Q4 Bank Earnings

The big banks kick off the fourth-quarter 2024 earnings season this week as names like JPMorgan JPM, Bank of America BAC, Wells Fargo WFC, and Citigroup C report. With many bank stocks having posted big gains in 2024, here’s what investors need to know.

Sentiment: Sentiment and commentary around banks is notably strong. Except for some cases of net interest margin compression, everything looks reasonably decent in the near term, as the market is completely sold on the soft landing story for the economy. Donald Trump’s reelection as president has also turbocharged the narrative about strong earnings growth. Valuations reflect the market’s high expectations for banks.

Key Points on the Banks’ Earnings Season

• Loan growth: Loan growth has remained tepid despite some early indications and commentary on it picking up. Areas like commercial and industrial loans are especially weak, with okayish performance in credit cards. We expect loan demand to rise as rates decline. Banks currently have an enormous amount of liquidity to support loan origination.
• Pressure on deposit costs: Deposit costs are expected to stabilize in the next couple of quarters or so before they start to fall.
• Credit costs: Given strong macroeconomic expectations, credit costs should remain manageable. Management commentary also pointed to better credit performance in the upcoming year than previously anticipated. Commercial real estate is not a big concern compared with a year ago.
• Net interest income: NII could be under some downward pressure in the next one or two quarters, but it varies substantially by bank. JPMorgan and Wells Fargo will see the most downward pressure, while NII has already bottomed for Bank of America. Downward pressure on NII should start getting support from loan growth over time.
• Fee income: All banks saw solid fee performance in recent quarters. Asset and wealth management benefit from high asset valuations. Investment banking recovered well. Trading continues its strong above-average run.
• Expenses: No major surprises are expected here. Expenses came in slightly higher in the third quarter, but a lot of that was because of revenue-generating fee items like asset management or investment banking.
• Capital: Regulators revised guidelines on the Basel III Endgame with an updated estimate of a 9% increase in capital vs. the earlier 19%, which is a slight positive, especially for large banks. Banks haven’t yet shown increased signs of capital returns. Trump’s election victory has excited the market about the prospect of more watered-down Basel III requirements.

Valuation upsides from here: Loan growth could start to pick up. Short-term rates may stabilize at a level neither too high nor too low, supporting net interest margins (2%-3%). There could be more scope for investment banking fees to increase

Valuation downside risks: Any deviation from the expectations of a soft landing would hurt valuations. Trading revenue may have to normalize lower. Any corrections in capital markets would hurt asset and wealth management businesses. Trump could also launch a severe trading war.