Financials Sector Earnings Outlook: Can Big Banks Stay Resilient Despite Turmoil?

 | Apr 11, 2023 09:51AM ET

The banking industry was in the news last quarter for all the wrong reasons. Bank failures and worries about tighter government regulations hurt share prices, even among large banks that appeared to have less exposure to the immediate crisis.

Now we approach Q1 earnings season, and banks are in the spotlight again as investors seek more insight into how the crisis affected balance sheets and future expectations.

Bank earnings frequently set the tone for the entire reporting season. Banks by their very nature are closer to the heartbeat of the economy than most industries, so their results and observations merit close scrutiny. With recent turmoil inside the industry itself, observations from banking leaders could be even more instructive to investors now.

Bank earnings start Friday morning before the open with expected results from JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC). That’s followed next Tuesday by Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). Morgan Stanley (NYSE:MS) is due next Wednesday.

Smaller banks will also be under investors’ microscopes this earnings season because that segment suffered the earliest impact of the crisis. Regional bank earnings to watch include PNC Financial Services (NYSE:PNC) expected Friday, M&T Bank (NYSE:MTB) next Monday, and U.S. Bancorp (NYSE:USB) on April 19, among others.

Though many may focus on smaller banks for signs of trouble on deposit rates and credit quality, deposit worries may also extend to larger banks. Money market funds have been siphoning off billions of dollars’ worth of savings from banks’ deposit holdings, according to New York Fed data recently reported by Bloomberg.

This means pressure could be growing on banks to raise their deposit rates to keep customers from fleeing, but that would potentially be painful for their margins.

h2 Credit questions/h2

Back to the elephant in the room—credit. Depending on future rate moves from the Federal Reserve and other operating and economic factors ahead, lending could tighten for consumers and businesses. If banks and their balance sheets come under more scrutiny, institutions may become more reluctant to lend to certain businesses and could dry up venture capital, commercial real estate, and other businesses dependent on a relatively free flow of funds.

There have also been more calls for bank regulation in the wake of this instability. Tighter regulation, if it comes, often means narrowing opportunity for banks to grow their businesses.

Meanwhile, the usual zebras and wildebeests roam the bank earnings landscape and are worth keeping in mind as you pore over results. Questions to consider include:

  • How was loan volume in Q1, and what are banks’ forecasts for loan volume in Q2 and beyond?
  • Are defaults likely to rise, and if so, in which industries?
  • How are deposit trends, and are banks paying more interest to keep depositors? If so, what would be the impact on margins?
  • Do banks think recession is likely, and, if so, how deep will it be?
  • How much did banks put aside in Q1 loan loss reserves to protect from possible credit defaults?
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The Nasdaq Bank Index (BANK)—which includes all bank stocks, not just the biggest ones—fell 18% in 2022 and then dropped another 22% in Q1.

h2 Will banks still beat analysts’ estimates? /h2

Keep in mind, the biggest banks have a long history of exceeding Wall Street’s expectations. Analysts expect the behemoths of banking to hold their own as far as year-over-year earnings and revenue. A resilient U.S. housing market and generally strong consumer spending in Q1 may have helped the biggest banks, and volatile trading in the capital markets could support revenue in banks’ trading businesses.

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.

The government and the Federal Reserve recently touted “resilience” in the banking industry, and the biggest banks often emphasize their “fortress balance sheets” built in part to protect them and their customers from financial contagion. Will investors be convinced big banks can sustain these historic strengths coming out of Q1 earnings season?

What about the more tentative outlook for regional banks facing even heavier exposure to a pandemic-battered commercial real estate sector? A lot of their commercial borrowers could have loans expiring soon and will likely be forced to refinance at much higher rates. There’s concern many of these businesses could default, leaving smaller banks holding the bag.