Investors are anticipating that major US banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, will report their lowest lending income in almost two years. This comes as these institutions navigate the end of the Federal Reserve’s period of high interest rates. It is expected that these banks will collectively announce a total net interest income of slightly less than $62 billion in their upcoming quarterly results. This figure represents a nearly 5% decrease from the third quarter of 2023.
Net interest income, which accounts for the difference between what banks pay on deposits and what they earn from loans and other assets, experienced a surge when the Federal Reserve swiftly increased rates beginning in 2022. During this time, banks adjusted rates for savers at a slower pace than for borrowers. However, this growth has started to diminish this year as banks gradually raise rates for savers, leading to compressed profit margins. Analysts estimate that the net interest income for the third quarter among the four largest US banks by assets will reach its lowest point since the end of 2022.
According to Bloomberg data, analysts predict an approximate 15% reduction in third-quarter total net profit across these four banks compared to the previous year. Saul Martinez, a banking analyst at HSBC, noted that these banks’ earnings reports will serve as a preview for net interest income trends toward the year-end and into 2025.
The profits that banks earn from loans are expected to face further pressure following the Federal Reserve’s recent interest rate cut, marking the first reduction in more than four years. The forecast includes additional rate cuts, which has already adjusted investor expectations for some banks’ earnings. Last month, an executive at JPMorgan cautioned that analysts were overly optimistic regarding the bank’s 2025 net interest income projections, which resulted in a more than 5% decrease in the bank’s shares.
JPMorgan’s net interest income for 2025 was initially forecasted to decline from $91.5 billion to $90 billion. However, projections for the following year have been revised to $89 billion. JPMorgan, a major beneficiary of higher interest rates, faces challenges as it has maintained a larger portion of its assets in shorter-duration or cash-like securities, which yielded higher returns when interest rates were elevated. Following the Federal Reserve’s rate cut, these holdings are expected to yield less.
Bank of America, on the other hand, allocated a substantial portion of unused consumer deposits into securities, which diminished in value as rates climbed, impacting profits. Although these investments affected the bank’s share price over the last two years, their values are now poised to improve as rates decline, thus having a lesser negative impact on Bank of America’s earnings.
Suryansh Sharma, a research analyst at Morningstar, stated that JPMorgan greatly benefited from rising rates due to its balance sheet positioning but would now be at a disadvantage with decreasing rates compared to other major banks.
JPMorgan and Wells Fargo are due to announce their results on October 11, followed by Bank of America and Citigroup on October 15. The banks anticipate lower net interest income as well as higher reserves for potential loan losses compared to the previous year. Loan losses have been gradually increasing as consumers exhaust their savings from the pandemic period amidst rising living costs.
Despite generally robust and resilient credit in a slowing economy, banks occasionally encounter challenges even during favorable circumstances, as noted by Martinez from HSBC. Loan growth has been slow due to heightened interest rates, with credit card lending being an exception. Analysts hope that reduced rates will encourage more borrowing from households and businesses.
Morningstar’s Sharma suggested there is potential for more loan origination due to significant capacity in bank balance sheets.
Goldman Sachs and Morgan Stanley are set to release their earnings on October 15 and 16, respectively. These banks are likely to be less affected by net interest income pressures due to their business models, which focus more on investment banking, trading, and wealth management. Goldman Sachs is anticipated to see a 26% increase in third-quarter profits compared to last year, when earnings were affected by its withdrawal from retail banking. Morgan Stanley, led by new CEO Ted Pick since January, expects about a 12.5% increase in net income.
A crucial factor in the financial recovery for these banks is projected to be investment banking. Analysts foresee continuation of rising fees after two subdued years. Investment banking fees across JPMorgan, Goldman, Morgan Stanley, Bank of America, and Citigroup are projected to increase by an average of at least 20%. Activity in equity and debt underwriting is expected to be particularly robust. The predicted resurgence in dealmaking has also benefited smaller independent advisors like Evercore and Lazard, which, along with Goldman, have outperformed the KBW Bank index and the S&P 500.
