Wall Street's big banks' earnings reports are coming tonight! Expectations of interest rate cuts have boosted the sector by 23%. Can their performance hold up?

Zhitong App has learned that JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo will release their quarterly earnings one after another on Friday. Prior to this, the KBW Bank Index, which tracks US bank stocks, rose 23% in the last quarter, marking the best quarterly performance since 2021 and significantly outperforming the broader market.

US bank stocks were under pressure for most of 2023, but began to surge at the end of October as confidence grew that the Federal Reserve would end its rate hike actions without triggering an economic recession. The focus now is on the timing of policy easing, and investors will carefully study its impact on the banking sector.

Richard Ramsden, an analyst at Goldman Sachs, said, "Bank stocks are clearly not as cheap as they used to be, but at the same time, I don't think people believe that bank valuations are too high."

Ramsden said that if banks perform better than expected in net interest income, loan growth, capital markets, and deposit pricing, "all of these will obviously translate into higher earnings and may further improve the relative performance of some banks."

The KBW Bank Index fell about 1% on Thursday, underperforming the broader market. The broader market closed basically flat.

Bank stocks had their best quarterly performance since 2021 last quarter.

Next Tuesday, investors' attention will turn to the earnings reports of Morgan Stanley and Goldman Sachs. On the same day, PNC Financial Services Group will also release its earnings report, making it a benchmark for regional bank performance.

Due to rising financing costs, it is expected that the fourth-quarter performance of large banks will generally be poor. Ramsden of Goldman Sachs said that net interest income in the banking industry is expected to decline, while increased expenses and weak trading revenue may also weigh on profits. He said that loans may grow moderately.

It is expected that banks will also disclose in detail the payments made to the Federal Deposit Insurance Corporation (FDIC) due to the collapse of regional banks. The collapse of regional banks disrupted the financial markets at the beginning of last year. Citigroup said on Wednesday that it expects to spend $1.7 billion to replenish the FDIC fund. Meanwhile, Bank of America said it will bear $1.6 billion in costs related to the Libor transition.

Reversal in Bank Stock Performance

Last quarter, the trend of US bank stocks reversed as the prospect of a Fed rate cut in 2024 eased concerns about net interest margins.

"Most large bank stocks rallied strongly at the end of last year because the market optimistically expected that the risk of a recession had greatly diminished and that the profitability of banks would not be significantly affected," said David Bianco, Chief Investment Officer for the Americas at DWS Group."Currently, large banks face much lower risks of bearing massive loan loss provisions or being forced to write down securities."

However, investors have sufficient reasons to remain cautious. The inflation rate is still far above the Federal Reserve's target, and the market is betting that the Fed will take more aggressive interest rate cuts than it has implied. Jamie Dimon, CEO of JPMorgan Chase, expressed doubts this week about whether the Fed's rate hikes can successfully contain inflation without ultimately harming the economy.

Some analysts suggest that investors should lower their expectations.

James Fotheringham of BMO Capital Markets downgraded the ratings of several US banks and financial institutions during the stock market rebound, warning that these companies seem vulnerable to the upcoming credit cycle.

Meanwhile, analysts at UBS Group mentioned the risk of "volatile market sentiment." UBS analyst Erika Najarian wrote in a report this week, "The January earnings season may hinder the recent growth momentum in the industry."

Data compiled by Bank of America shows that hedge funds have been selling financial stocks for the past four weeks, with an average outflow of $200 million per week, while institutions and retail clients are also net sellers.

However, from a broader perspective, data from Citigroup shows that in the past month, the financial industry is the only sector where the majority of analysts have raised their earnings expectations.

Bianco of DWS stated that due to the strong profitability of JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, he maintains a "buy" rating on the stocks of these large banks. He mentioned that credit has remained stable, offsetting the significant decline in global trading fees, and the rebound in initial public offerings (IPOs) has also brightened the outlook.