Earnings season "takes the lead"! Wall Street's major banks may see a two-year low in Q3 loan income, while investment banking business is expected to recover

This week marks the beginning of the earnings season for US stocks, with bank stocks taking the lead. With the Fed cutting interest rates, what changes can we expect in the Q3 financial reports of US investment banking giants compared to the previous year?

Analysts predict that the net interest income of US investment banking giants in the third quarter will decrease, coupled with an increase in potential loan loss provisions, impacting the overall profitability of banks. However, influenced by the Fed's rate cuts, investment banking activities will rebound, and profit-making transactions such as M&A and equity underwriting will gradually pick up.

Among the major banks, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates, and will be significantly affected by the decrease in net interest income; Goldman Sachs and Morgan Stanley's business models lean more towards investment banking, trading, and asset management, generating more revenue from investment banking activities than other banks, hence an expected increase in profits in the third quarter of this year.

On Friday morning, the largest US bank, JPMorgan Chase, and the third-largest bank, Wells Fargo, will announce their third-quarter financial reports; next week, Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs will release their reports.

Net Interest Income Likely to Hit a Two-Year Low, Loan Losses Gradually Increasing

According to Bloomberg data, investors expect that the overall net interest income of JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo in Q3 2024 will be slightly below $62 billion, a decrease of nearly 5% from Q3 2023, marking the lowest level since the end of 2022.

At the beginning of 2022, the rapid rate hikes by the Fed led to a significant increase in net interest income for major banks, as deposit rates rose slower than borrowing rates. However, this prosperity began to wane this year as banks gradually raised deposit rates before the Fed's rate cut in September, squeezing the space for net interest income.

Furthermore, due to high rates dampening loan demand, apart from credit card loans, loan growth in the US has been relatively slow this year. Analysts predict that the Fed's rate cuts will encourage households and businesses to increase their debt.

It is worth noting that while loan losses at major US banks remain at very low levels, they are gradually increasing as consumers have depleted their savings from the pandemic period, while living costs are rising. Martinez, an analyst at HSBC, stated:

"Credit has been performing well and showing some resilience in the face of economic slowdown. Signs indicate that this situation should continue. However, these are banks after all, and occasional fluctuations can occur, even in good times. I believe our complacency towards credit has made us overlook potential risks, and any fluctuations could be seen as negative signals."

In conclusion, due to the decrease in net interest income and the increase in potential loan loss provisions, the overall profitability of banks will be impacted.

Among the major banks, JPMorgan Chase is most affected by the Fed's rate cuts and interest rate changes.

JPMorgan Chase is the bank that benefited the most from high interest rates, with a higher proportion of short-term or cash securities in its assets. These securities yield higher returns in times of high interest rates, but the returns have decreased after the Fed's rate cuts. Morningstar research analyst Suryansh Sharma stated:

"Our view has always been that JPMorgan Chase benefits greatly from rising interest rates, mainly due to the structure of its balance sheet. Now, with interest rates falling, JPMorgan Chase will be at a significant disadvantage among major banks."

Last month, a senior executive at JPMorgan Chase warned that analysts' expectations for the bank's 2025 net interest income were overly optimistic. This statement made investors uneasy, leading to a more than 5% drop in JPMorgan Chase's stock price. Analysts revised down JPMorgan Chase's 2025 net interest income from $91.5 billion to $89 billion.

Similar to JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates, with net interest income being a significant source of their overall revenue.

On the other hand, Goldman Sachs and Morgan Stanley's business models lean more towards investment banking, trading, and asset management, resulting in them being less affected by the compression of net interest income.

Investment Banking Business Expected to Recover

Analysts generally expect that the investment banking business of major U.S. banks in Q3 2023 will grow compared to the same period last year. The average investment banking revenue of JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup is expected to increase by at least 20%, with strong performance expected in new stock offerings and bond underwriting.

Over the past two years, the Federal Reserve has aggressively raised interest rates to curb inflation, benefiting ordinary depositors but also making major corporations cautious in significant decisions such as acquiring small competitors or selling parts of their businesses, which are core businesses for investment banks.

As the Federal Reserve begins to reverse its monetary policy, the investment banking business is expected to see a recovery.

Moody's rating analysts pointed out in a report that debt and equity issuances at major banks in the third quarter have generally increased, completed merger transactions remain steady, and although U.S. initial public offerings (IPOs) are still at historically low levels, they have more than doubled compared to a year ago. Therefore, investment banking revenue is expected to grow.

As mentioned earlier, Goldman Sachs and Morgan Stanley's business models lean more towards investment banking, trading, and asset management, and they generate more revenue in the investment banking business than other banks. Therefore, after two years of downturn, their profits are expected to increase in the third quarter of this year.

Analysts expect that Goldman Sachs' Q3 profit will increase by 26% year-on-year, and Morgan Stanley's net profit will increase by 12.5% year-on-year.

Sell-Side Analysts' Expectations for U.S. Major Banks' Q3 Financial Reports

As analyzed above, Goldman Sachs and Morgan Stanley are expected to see profit growth in the third quarter of this year, while JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are highly sensitive to interest rates and are more affected by the decline in net interest income.

According to FactSet data, sell-side analysts have made expectations for the third-quarter financial reports of major U.S. banks and compared them with the actual results from the third quarter of 2023, as follows: