With the second-quarter reporting season kicking off, investors are looking for more signs in the U.S. financial system as bank earnings hold the key to more stock market gains.
JPMorgan Chase, Citigroup and Wells Fargo will report second-quarter earnings on July 12. Goldman Sachs will release its results on July 15. Bank of America and Morgan Stanley will release results on July 16.
Bank stocks are relatively strong this year as investors continue to lean into the U.S.’s largest banks as havens from banking sector woes. Of the trio of big banks, Citigroup notched the largest gains this year, with a rise of 24%, followed by a 21% gain for Wells Fargo and a 20% rise by Goldman.
The banking sector was put through a stress test recently. This test is designed to assess the resilience of individual institutions in crisis scenarios. The positive outcomes from these tests have further fueled demand, bolstering investor confidence.
U.S. banking giants Bank of America, Citigroup, Morgan Stanley and JPMorgan Chase told shareholders they planned to increase their dividend payouts and teased billions of dollars of future stock buybacks after they passed annual “stress tests” from the Federal Reserve.
The largest U.S. lender, JPMorgan, is expected to report earnings per share (EPS) of $4.39, according to Bloomberg estimates. Bank of America's EPS is forecast to slide to 80 cents, though EPS at Citi and Goldman are projected to climb.
Investment-Banking Momentum May Builds
Demand for investment banking services is recovering after geopolitical concerns and stubbornly high interest rates dulled deal activity. Investment banks took a hit last year as dealmaking and sales of new securities remained muted, with many firms forced to cut thousands of jobs.
Citi Financial Chief Mark Mason last month reported a pickup in investment-banking activity compared to year-ago levels, due partly to a rise in mergers-and-acquisitions activity, as well as capital raising.
Analyst Jim Mitchell also upped his per-share earnings estimates across the financial firms for the second quarter, 2024, and 2025.
His updated second-quarter estimates reflect better trends across investment banking and trading, he says. Increased estimates for this year and 2025 reflect higher fees from wealth and asset management businesses and net interest income.
Big Banks Are Taking Hits From Commercial Real Estate
Commercial real estate is often talked about as a problem for smaller banks, but big banks are emerging with the most evident scars so far.
The trouble is at big banks and their loans to properties that are intended to be leased to third parties. For CRE loans involving properties that aren’t owner-occupied and are held by banks with over $100 billion in assets, more than 4.4% were delinquent or in nonaccrual status in the first quarter. That was up over 0.3 percentage points from the prior quarter.
Larger banks might also face more- immediate maturities in key categories. According to a March analysis from MSCI Real Assets, national banks held 29% of the value of the tracked office debt that matured last year and have 20% of the debt due this year. The regional and local banks’ share was 16% last year and 13% this year.
CRE loans are often structured with balloon repayments of principal at the end of their terms. Banks with closer payoff dates should be taking a harder look at the likelihood of those loans’ repaying.