6 Major Banks Set To Trump Q2 Earnings Amid Tough Backdrop

The earnings season is knocking at the door and investors are keeping a close watch on the performance of major banks.

After decent first-quarter results, major banks’ performance is expected to be dismal this time. The primary reason is the disappointing lending scenario — mainly in the areas of commercial and industrial, and real estate — which persisted during the second quarter. This is expected to have an adverse impact on banks’ net interest income.

Further, the Federal Reserve’s accommodative policy stance, flattening of the yield curve and steadily rising deposit betas will likely hurt net interest margin (one of the key metrics for gauging banks’ profitability) in the to-be-reported quarter.

Dismal capital markets performance is also a matter of concern. During the second quarter, several concerns, including some lingering from the prior quarters, like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown persisted. The central bank’s policy accommodation stance also led to ambiguity. All these factors weighed on investors’ mind and resulted in lower volatility. Thus, this will likely lead to decline in trading revenues.

The above-mentioned concerns also led to lower global M&A deal value and volume during the second quarter. Thus, growth in advisory fees is projected to be hampered. Nonetheless, underwriting business is anticipated to provide some support driven by rise in equity issuances, while debt issuances remained soft.

In a reversal in trend, mortgage banking performance is projected to improve on the back of lower mortgage rates, which drove the refinancing activities during the quarter. Seasonality aided mortgage banking revenues too. Additionally, wealth management operation will offer some support, given the decent equity markets performance.

Credit quality is also likely to remain strong, backed by conservative underwriting standards and improving economy, while delinquency rates related to consumer loans will likely rise.

Expense reduction, which has had helped banks remain profitable in the past, is unlikely to be a big support this earnings season. Increased investment in technology to strengthen digital offerings as well as starve off competition from fintech firms, and efforts to expand to new geographical regions are expected to result in a moderate rise in costs. But overall non-operating expenses are likely to be manageable.

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Written By: Zacks Investment Research