US Banks’ Profits Under Pressure: Lower Interest Payments, Higher Credit Losses

Major U.S. banks are expected to report weaker profits due to decreased interest earnings and rising provisions for loan losses. Federal Reserve stress tests reveal increased risks in commercial lending.

Several of the largest U.S. banks are anticipated to report weaker profits for the second quarter, with analysts attributing this trend to decreased earnings from interest payments and increased provisions for deteriorating loans. As banks prepare to kick off earnings season, experts predict that provisions may rise for potential losses on commercial and industrial (C&I) loans, as well as those on commercial real estate. The Federal Reserve's recent health assessment revealed that C&I loans now pose greater risks to major banks compared to previous years. Under the Fed's stress-test scenario, C&I loss rates are projected to increase to 8.1%, up from 6.7% in the previous year's examination.

Despite this challenging outlook, Wall Street divisions are expected to benefit from a surge in dealmaking activities. Global merger and acquisition volumes reached $1.6 trillion in the first half of the year, marking a 20% increase from the previous year, according to data from Dealogic. Additionally, equity capital market volumes saw a 10% rise during the same period.

Analysts will closely monitor banks' commentary on interest income, as market participants increasingly anticipate a potential cut in interest rates by the Federal Reserve in the coming months. Banks have experienced less competition for deposits as rates stabilize, allowing them to retain customer funds. This stability has enabled banks to leverage these deposits by repricing loans at higher levels.

Industrywide, net interest income (NII) is expected to reach a trough in the second or third quarters before rebounding as banks negotiate new loans at relatively higher rates. Interest rates had plummeted during the pandemic, leading to historically low mortgage rates in 2021 and multi-year lows for auto loans, before the Fed initiated rate hikes in early 2022.

As the six largest U.S. banks prepare to announce their results, here are the key factors to watch for, according to analysts:

JPMORGAN: The largest U.S. lender is projected to report a 13% decline in earnings per share (EPS) for the second quarter compared to the previous year, as it increases investments in the company, leading to higher expenses.

BANK OF AMERICA: The second-largest U.S. bank is expected to see a 9% decrease in EPS, primarily due to lower NII.

WELLS FARGO: Wells Fargo's EPS is forecasted to rise by 3%, supported by investment-banking fees and reduced provisions for credit losses. However, its NII is expected to remain subdued.

CITIGROUP: Profits at Citigroup are predicted to increase, driven by the strength of its services division, referred to as the "crown jewel," and higher investment banking fees.

GOLDMAN SACHS: Earnings at Goldman Sachs are anticipated to more than double compared to the second quarter of 2023, benefiting from a resurgence in deals and fewer writedowns for its consumer business.

MORGAN STANLEY: Rival Morgan Stanley is expected to see a 33% increase in EPS, supported by heightened activity in mergers, acquisitions, and capital markets.

The upcoming earnings reports from major U.S. banks are likely to reflect a mixed performance, with varying impacts on profitability across different institutions. The evolving economic landscape and shifting interest rate environment will continue to shape the financial sector's outlook in the coming months.