Financials Sector Earnings Outlook: Will Major Banks Offer Clues to a Soft Landing—or Harder Recession?

Bank earnings kick off Q4 earnings season in a big way tomorrow as four major institutions report. Last quarter, many big banks beat analysts’ expectations, but this year’s economic challenges could pose headwinds for the industry. look new features - The Ticker Tape
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Key Takeaways

  • Big Bank Results Start Tomorrow, Could Offer Wide-Ranging Clues About the Economy

  • Investors Might Check Loan Volume, Loan Loss Reserves and Credit Health for a Broader View

  • Is a 2023 Recession Likely? Bank Executives May Have Thoughts

Shawn Cruz, Head Trading Strategist, TD Ameritrade

Last October 13, the S&P 500® index (SPX) fell to 3,491, which ultimately turned out to be its 2022 intraday low. 

The very next day, several of the largest U.S. banks reported better-than-expected Q3 earnings, and the SPX began a nearly 10% rally through year-end.

Coincidence? Maybe not. Bank earnings often help set the tone for the entire reporting season, which in turn can flash a green or red light for the broader market. Banks, by their very nature, are closer to the heartbeat of the economy than most industries, so their results and observations merit close scrutiny.

Heading into Q4 earnings season—which starts Friday morning before the open with expected results from JP Morgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC)—there’s a long list of questions investors hope banks can answer about the financials sector and the economy as a whole. Their results and how they answer these questions could help determine if the light turns green or red on Wall Street.

What Investors Might Want to Learn

  • How was loan volume in Q4, and what is the banks’ forecast for loan volume in Q1 and beyond?
  • How does credit look, both for consumers and businesses?
  • Is a recession likely, and, if so, how deep will it be?
  • How much did banks put aside in Q4 loan loss reserves to protect from possible credit defaults?
  • Has inflation peaked, and, if so, how much will it drop?
  • Will the initial public offering (IPO) market rebound at all this year?
  • Could the recent decline in mortgage rates set a floor below the slumping housing market?
  • What’s the outlook for possible mergers and acquisition (M&A) activity? Goldman released research last week that it expects M&A to pick up in the second half of 2023, but will other banks agree?
  • Is the long descent in stocks and bonds still hurting trading activity in the capital markets?

Though there may not be many simple answers during bank earnings season, consider this a guide for evaluating the sector. Several of these industry challenges helped drive bank earnings into the ditch the first three quarters of 2022, and analysts expect more suffering to show up on Q4 balance sheets. The Nasdaq Bank Index (BANK)—which includes all bank stocks, not just the biggest ones—fell 18% in 2022.

Q4 Bank Earnings Seen Falling Sharply

That’s roughly in line with analyst expectations for a 16% year-over-year drop in Q4 2022 bank earnings, according to research firm FactSet. Banks are expected to be among the industries with the weakest Q4 earnings results, in part due to higher interest rates that slowed mortgage and other loan demand, along with falling capital markets activity like IPOs.

That said, the biggest banks have a long history of beating Wall Street’s expectations. In Q3, several managed that even as year-over-year profits slumped amid growing loan loss provisions and a dusty IPO market. At the same time, rising net-interest income due to the Federal Reserve’s rate increases provided some support. Easy year-over-year comparisons on interest rates could mean continued bottom-line support from this aspect of the business in Q4.

Beyond the raw numbers, it’s also important to listen closely to what banking executives say on their earnings calls and in their press releases. That’s where they often paint a more detailed picture of the economy and the industry. Last earnings season, banking executives warned of a potential U.S. recession and slowing global growth, along with the chance of rising credit risk as interest rates rose to 15-year highs. At the same time, they talked about “resilient” consumer sentiment, low delinquencies and decent loan growth. 

Will their tone change versus Q3? If they sound more negative, that might raise new speed bumps for the broader market.

BANK ON IT. Banking industry stocks (BANK—candlesticks) have lagged the S&P 500 index (SPX—purple line) over the last year. Data sources: Nasdaq, S&P Dow Jones Indexes. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Keep an Eye on Loan Activity for Clues

When the big banks report, keep an eye on the general level of loan activity and the quality of their existing loans. If the quality of their loan portfolios is starting to deteriorate and people are having trouble with payments, that could be a sure sign of economic weakness.

At the same time, banks that play heavily in the capital markets like Morgan Stanley (MS) and Goldman Sachs (GS) might see results diverge from diversified banks like BAC and JPM that are more closely tied to the consumer economy.

Here’s a quick look at what to watch at a few of the individual banks as they report:

JP Morgan Chase (JPM)

Scheduled Report Date: Friday, January 13 before opening bell

Expected Q4 EPS (Analysts’ Consensus): $3.14

Year-Ago EPS: $3.33

Expected Year-Over-Year EPS Change: –5.7%

Expected Q4 Revenue (Analysts’ Consensus): $34.16 billion

Year-Ago Revenue: $30.35 billion

JPM kicked earnings season off last quarter with an impressive report, beating analysts’ earnings per share (EPS) and revenue estimates with wind at its back from strong net interest income. The year-over-year net-interest tailwind likely continued in Q4, though it remains to be seen if JPM can match the 34% net-interest income rise it enjoyed in Q3. Another question is whether the bank decides to add additional loan loss reserves, which eat into profits. In Q3, it put aside $808 million as insurance against defaults. With lots of talk about a possible recession ahead and many highly leveraged tech and energy firms out there, it wouldn’t be shocking if JPM and other big banks continue to build reserves this way, keeping profit growth a bit muted.

As always, investors should listen closely to JPM’s CEO, Jamie Dimon, who has a big megaphone on Wall Street. His message in Q3 earnings was on the gloomy side, referring to “significant headwinds.” It’s going to be interesting to see if he sounds any more optimistic this time. A preview came earlier this week when Dimon downgraded his comments from last spring about an economic “hurricane” to some “storm clouds.” However, he seeded another downpour saying the Fed may have to raise rates to 6% to defang inflation, which is even higher than the 5% level two Fed members suggested this week.

Dimon told the Fox Business channel that the central bank should go to 5% and take a pause to see if prices are easing. If the picture isn’t improving, the Fed could resume tightening in this year’s Q4. Dimon added that inflation’s path in the coming months isn’t likely to be predictable, “Inflation won’t quite go down the way people expected…But it will definitely be coming down a bit.”

Citigroup (C)

Scheduled Report Date: Friday, January 13, before opening bell

Expected Q4 EPS (Analysts’ Consensus View): $1.26

Year-Ago EPS: $1.46

Expected Year-Over-Year EPS Change: –13.7%

Expected Q4 Revenue (Analyst’ Consensus View): $17.9 billion

Year-Ago Revenue: $17.02 billion

Like many other big banks, saw a steep drop in Q3 profits, and analysts expect more of the same this time around. However, the anticipated 13.7% year-over-year decline represents improvement over a 25% decline in Q3. Despite earnings weakness, some analysts believe C is making progress turning around its business, especially by exiting several international markets as part of an effort to streamline operations, Barron’s recently reported.

C has also seen renewed health in its personal banking division, a bright spot for it in Q3. We’ll see if that continued in Q4. In addition, keep an eye on the firm’s capital markets trading results. Last time, C came up a bit short in fixed income trading revenue but beat expectations in equities revenue.

Wells Fargo (WFC)

Expected Report Date: Friday, January 13, before opening bell

Expected Q4 EPS (Analysts’ Consensus View): $1.05

Year-Ago EPS: $1.25

Expected Year-Over-Year EPS Change: –16%

Expected Q4 Revenue (Analysts’ Consensus View): $20.02 billion

Year-Ago Revenue: $20.86 billion

WFC was back in the news late last month—and not in a good way. The bank was fined nearly $4 billion for its role in mismanaging consumer loans for more than 16 million customers, The Wall Street Journal reported.

This continues years of headlines about corporate malfeasance overshadowing other developments at WFC, weighing on shares. At the same time, WFC is an interesting canary in the coal mine for the consumer economy because it has a big business in both home and auto. It’ll be important to check Q4 results in those categories for WFC and to hear executives’ views on how demand is shaping up.

Also, WFC dropped a bombshell this week that it’ll downsize its role in the U.S. home mortgage business it once dominated in light of rising rates and continued regulatory scrutiny. WFC, the company’s No. 1 mortgage lender as late as 2019, will continue to offer home loans only to existing bank and wealth management customers and borrowers in minority communities. What does all this mean for the future of the company

Bank of America (BAC)

Expected Report Date: Friday, January 13, before opening bell

Expected Q4 EPS (Analysts’ Average Estimate): $0.82

Year-Ago EPS: $0.82

Expected Year-Over-Year EPS Change: Flat

Expected Q4 Revenue (Analysts’ Average Estimate): $24.59 billion

Year-Ago Revenue: $22.16 billion

Like a few other banks, BAC reported stronger-than-expected Q3 results— in this case, aided by solid fixed income trading revenue and net interest income. Also, like other banks, it saw earnings results clipped by loan loss reserves. At the time, BAC executives spoke about “resilient” U.S. consumers, so we’ll see if that continued in Q4. Also, BAC’s equities trading was below the Street’s expectations in Q3, so check whether BAC rebounded from that in Q4. Markets were stronger in Q4, which can sometimes help trading volume.

Bears Still Roaring

One thing that hasn’t changed since last earnings season is the deeply inverted U.S. Treasury yield curve, and that’s bad news for banks.

An inverted yield curve is when near-term yields like those on the 2-year Treasury note are much higher than yields on the 10-year Treasury note (TNX). Recently, that inversion was above 60 basis points. This hurts banking industry profits and probably won’t improve until the Fed starts to lower rates.

Also, the Fed expects unemployment to climb back above 4% this year, which is still low historically but up from recent light levels. Rising unemployment, along with continued high borrowing costs for car loans and mortgages, could pressure future bank earnings, especially for smaller, regional banks with heavy housing exposure.

Happy trading,


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Key Takeaways

  • Big Bank Results Start Tomorrow, Could Offer Wide-Ranging Clues About the Economy

  • Investors Might Check Loan Volume, Loan Loss Reserves and Credit Health for a Broader View

  • Is a 2023 Recession Likely? Bank Executives May Have Thoughts

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