JPMorgan, Wells Fargo to kick off bank earnings parade as Wall Street weighs lower interest rates

By Steve Gelsi

Fed rate cut may spark more economic activity, but diversified banks may not benefit as much as smaller banks

JPMorgan Chase & Co. and Wells Fargo & Co. kick off third-quarter earnings season this coming Friday, as Wall Street looks for fresh clues on how lower interest rates may boost profits for big U.S. banks.

Those two banks will be followed by Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Bank of America Corp. (BAC) on Oct. 15 and by Morgan Stanley (MS) on Oct. 16.

With a smaller portion of their revenue coming from loans compared with regional banks, the big U.S. banks may not get as much of a boost from lower interest rates, at least in their lending businesses.

But if the Federal Reserve's interest-rate cuts spark more economic activity overall, diversified banks will benefit from a pickup in dealmaking, investing, credit-card spending and financial transactions across the board.

Wall Street will no doubt be paying close attention to indications from the biggest banks on the effects of the Fed's moves on interest rates.

The key question is whether bank stocks will get a boost from investors based on their future profit expectations.

This is a topic that's being brought up frequently with KBW analysts.

"Relative rate sensitivity is understandably dominating our recent investorconversations and there's a high degree of urgency to identify relative standouts as stocks begin to move on expectations for a multi-year easing cycle," KBW analysts said in a report this week.

Other analysts have been taking a look at stock-price gains by some of the banks and asking whether they're undervalued or overvalued, depending on profit expectations.

At least one analyst thinks that JPMorgan Chase's (JPM) year-to-date gain of 20.4% deserved a ratings change to a less bullish level.

Morgan Stanley analyst Betsy Graseck on Sept. 30 downgraded JPMorgan Chase's stock to equal weight from overweight.

"We see more room for positive net interest margin surprises elsewhere in our coverage, model negative operating leverage next year and are taking some chips off the table after outperformance," Graseck said about JPMorgan Chase.

Graseck reiterated overweight ratings on Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp.

Oppenheimer analyst Chris Kotowski said Wednesday that most of the bank outlooks shared with analysts during a round of industry conferences in September have remained unchanged.

While some investors may worry about uncertainty caused by instability in the Middle East and by the U.S. election, Kotowski said these factors are nothing new in markets.

"It could of course all change tomorrow, but our view is that the current economic environment is about as boring and predictable as you will ever see it," he said.

Overall, Kotowski expects banks to report a roughly 7% increase in investment-banking revenue in the third quarter, driven by debt refinancings, while he anticipates mergers and acquisitions and equity underwriting to be "lackluster."

"We continue to think a strong rebound is likely and that [Wall Street]is generally underestimating the potential," he said.

On the regulatory front for banks during the quarter, Michael Barr, vice chair of supervision for the Federal Reserve, outlined revisions to the so-called Basel III endgame capital-requirement proposals.

The changes are expected to free up capital that banks could potentially use for stock buybacks and dividends, but it will be a few months before the rules are finalized.

Analysts slightly more bullish on JPMorgan's earnings

Analysts currently expect JPMorgan Chase to report third-quarter earnings of $4 a share and revenue of $41.49 billion on Friday.

The bank had earnings per share of $4.33 and revenue of $39.874 billion in the same period a year ago.

Analyst expectations are now more optimistic for JPMorgan's third-quarter results than they were at the start of the quarter on June 1, when the consensus estimate was $3.92 a share, according to FactSet data.

The biggest single-day move in JPMorgan's stock during the quarter took place on Sept. 10, when it dropped 5% after the bank said Wall Street's 2025 net-interest-income estimates struck it as too high, Oppenheimer analyst Kotowski said.

But Kotowski said the comments align with the bank's bearish net-interest-income view since the third quarter of 2022.

JPMorgan Chase's July 12 forecast for 2024 net interest income excluding its markets unit is about $91 billion, a forecast it raised from its earlier view of $89 billion, issued on April 12.

During the third quarter, JPMorgan Chase Chief Executive Jamie Dimon maintained a high public profile through various speaking appearances.

He generally stuck to the themes in his annual shareholder letter as well as a column he wrote over the summer for the Washington Post on the importance of bipartisan communication by U.S. presidents.

Dimon also said that he was more worried about geopolitical risks posed by the wars in Ukraine and the Middle East than he was about inflation.

On the dealmaking front, JPMorgan Chase was reportedly in talks with Apple Inc. (AAPL) on taking over the Apple Card program from Goldman Sachs Group Inc. (GS), but the bank has not officially confirmed that.

Also read: JPMorgan in talks with Apple to take over its credit-card venture: report

Earnings expectations for Wells Fargo remain flat

Analysts expect Wells Fargo to report third-quarter profit of $1.28 a share on revenue of $20.39 billion when the bank releases its third-quarter results this coming Friday, compared with $1.48 a share and revenue of $20.86 billion a year ago.

The $1.28 a share outlook has remained unchanged from the start of the third quarter, which was a relatively quiet period for Wells Fargo's business.

Wells Fargo has reportedly been making strides on lifting the $1.95 trillion asset cap imposed on the bank in 2017, the most severe regulatory action against Wells Fargo after a string of infractions including a scandal over the creation of fake bank accounts.

The bank has submitted a third-party review of its risk and control efforts as part of its efforts to lift the cap, the report said.

Citi, Goldman and Bank of America to release earnings

Bank of America ranks as the largest of the three banks reporting third-quarter earnings on Oct. 15, followed in size by Citigroup and then Goldman Sachs.

Analysts currently expect Bank of America to earn 77 cents a share on revenue of $25.29 billion, compared with 90 cents a share a year ago on revenue of $25.2 billion.

At the start of the quarter, analysts had expected Bank of America to earn 81 cents a share.

Analysts currently expect Citigroup to earn $1.31 a share on revenue of $19.84 billion, compared with $1.63 and $20.139 billion a year ago. Their view on Citi has grown less bullish for the quarter; their July 1 projection was for $1.45 a share.

Citi is in the midst of a massive restructuring and has been giving quarterly updates on its progress on elements including plans to float an initial public offering for its Banamex retail bank in Mexico.

Also read: Regulators say Citigroup still doesn't totally have its house in order

Goldman Sachs is expected to report third-quarter earnings of $7.43 a share on revenue of $12.04 billion, compared with $5.47 and $11.817 billion a year ago.

The bank has seen the largest reduction in analysts' profit projections, down from $8.72 a share at the start of the quarter.

The trimmed profit view for Goldman Sachs during the quarter came as Chief Executive David Solomon warned on Sept. 10 that the bank is seeing a roughly $400 million hit to revenue from a drop in trading activity, as well as the impact of reducing its private-equity investment portfolio.

Solomon cited a "more challenging" macroeconomic backdrop, particularly amid the stock-market selloff in early August that saw equities drop sharply.

Also read: JPMorgan, Goldman Sachs shares move sharply lower on Solomon's deal comments, revised capital requirements

Morgan Stanley earnings estimates have been stable

Analysts expect Morgan Stanley to report third-quarter earnings of $1.60 a share on revenue of $14.32 billion when its releases its results on Oct. 16. Last year the bank had earnings per share of $1.38 and revenue of $13.173 billion.

With its large wealth-management unit as well as its E-Trade brokerage unit, Morgan Stanley's earnings have been seen as more stable during the quarter.

Analysts have slightly trimmed Morgan Stanley's third-quarter earnings estimate by 3 cents from their projection of $1.63 a share at the start of the quarter.

-Steve Gelsi

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10-05-24 0604ET

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