Key facts
- US bank investors will focus on the impact of higher interest rates on dealmaking and lending in Q3 earnings.
- Analysts expect Q3 earnings for the largest US banks to rise up to 20% year-over-year.
- The KBW Bank Index is down 13% from its August peak.
- JPMorgan Chase and Bank of America expect differing trends in investment banking fees for Q3.
- Banks have reduced the duration of their securities portfolios to manage risk.
- IPO cancellations for Oura and SB Energy were linked to surging bond yields.
Investors are set to closely examine the third-quarter earnings reports of major US banks next week, with a particular focus on how the recent surge in Treasury yields is impacting dealmaking, lending growth, and overall funding costs for the financial sector.
Despite pressure on bank stocks due to rising bond yields, with the KBW Bank Index down 13% from its August peak, analysts anticipate that the largest lenders will report a year-over-year increase in profits for the third quarter. Key areas of scrutiny will include credit quality and the trajectory of deposit costs.
JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo are scheduled to release their earnings on October 13, followed by Morgan Stanley and Bank of America on October 14. The late-quarter slowdown in capital markets activity due to higher interest rates has raised concerns about potential increases in deposit costs and a weakening of credit quality.
Cheryl Pate, a senior portfolio manager at Angel Oak Capital Advisors, noted that investors will be seeking guidance on credit growth and deposit costs, but does not anticipate significant deposit outflows or drastic rises in costs. UBS analyst Erika Najarian also pointed to the spike in yields as a factor in bank stock weakness, emphasizing the need for reassurances on the capital markets pipeline, loan growth, and contained deposit cost increases.
Banks are not expected to face the same unrealized losses in their securities portfolios as they did during the 2023 banking crisis, as most have since reduced portfolio duration and managed risk, according to Pate.
Investment banking revenue will be a key focus, especially after surging bond yields led to IPO cancellations in late September for companies like Oura and SB Energy. Investors will be looking for indications of potential deals and execution in the fourth quarter to forecast future investment banking revenue. Bank of America CEO Brian Moynihan indicated an expected drop of at least 10% in investment banking fees for the third quarter, contrasting with JPMorgan's expectation of an increase.