Big bank earnings are underway. Here's what to look for

With second-quarter bank earnings underway, analysts are watching for how banks are faring amid an uncertain macroeconomic and political landscape.

Over the last few years, most of the nation’s biggest banks have seen growth in revenues and profits as they benefit from a healthy stock market, a still-strong consumer, and an economy that’s humming along. These larger-scale banks are expected to beat quarter-over-quarter and year-over-year comparisons this time around, as revenue and earnings per share (EPS) continue to grow, said Brian Mulberry of Zacks Investment Management.

Big players in consumer banking are expected to flex that strength once again — especially coming off the heels of the Federal Reserve’s annual stress test, which they passed with flying colors, according to Mulberry.

“What I would expect from this particular earnings season is to have them really kind of highlight the quality that was revealed in coming out of that stress test environment,” he said.

Bank earnings season kicked off once again Friday with JPMorgan Chase, Citigroup, and Wells Fargo reporting their second-quarter results before the bell. Goldman Sachs is set to report on Monday, followed by Morgan Stanley and Bank of America on Tuesday. Here are some of the biggest things to look out for.

A (continued) boost to investment banking

Goldman Sachs and Morgan Stanley could both see profits buoyed for the second quarter and guidance revised upwards for the remainder of the fiscal year, thanks to a sustained rebound in investment banking, positive price action, and resilient trading, according to a recent report by BofA Securities.

These forecasts are in line with what the investment banking giants saw in the first quarter, when Morgan Stanley’s revenues outperformed in wealth management, equities trading, and investment banking, and Goldman’s balance sheet got a big boost from record — or near-record — performance in its investment banking and equities divisions.

A positive investor bias and strength in equities are especially favorable for Morgan Stanley, and could help stabilize its wealth NII, BofA said. The research firm sees momentum in investment banking activity continuing into 2025, which will continue to drive both banks’ stocks.

Moody’s is also expecting second-quarter results across the global banks to show “significant improvements in some investment banking revenue sources” compared with the same period a year ago.

The banks could also see increased revenues from advising on mergers and acquisitions, which were up both from the prior quarter and from a year earlier, according to Moody’s.

Mulberry of Zacks Investment Management pointed to the higher-for-longer interest rate environment as a driver behind the increase in M&A activity later this year, as companies begin to buckle under the pressure of higher capital costs.

“The big merger between SkyDance and Paramount is one that’s going to kind of be, I think, just the start of a more robust acquisition cycle as companies across sectors that are in a healthier, stronger balance sheet position, might look to add growth by buying competitors,” he said.

While this will be a boon to traditional investment banks like Morgan Stanley and Goldman, JPMorgan’s growing investment banking division also caught significant windfall. But Mulberry expects there to be enough business to go around.

The impact of a long-awaited interest rate cut

With the futures market seeing a 75% chance of a September rate cut, BofA said that it’s keeping an eye on the strength of earnings per share (EPS) levels against lower interest rates at JPMorgan and Wells.

Federal Reserve chair Jerome Powell has repeatedly said the central bank is waiting to feel more confident about inflation returning to its 2% target before it will consider slashing interest rates. The Fed left its benchmark federal funds rate unchanged at its June meeting, penciling in just one rate cut this year — well below its previous forecast of at least three cuts earlier in the year.

But inflation is hedging down and the unemployment rate is inching up, showing signs of a cooling economy. And in another sign of an impending cut, Powell warned earlier this week that holding rates high for too long could stunt economic growth.

Lower rates means smaller profits from loans for banks. That could mean that the highly-anticipated bottoming in NII could be around the corner, according to BofA.

Investors were hoping for a potential upgrade to fiscal year guidance on net interest income (NII) at JPMorgan, which would mean an improvement from its previous downbeat projection of $91 billion for the year. That did not take place, however.

BofA also projected that Wells Fargo is similarly moving towards a 7% decline in NII guidance — on the smaller end of its projected 7-9% drop. The bank reported a 9% decline in the second quarter, but said the metric will likely bottom out in the latter half of 2024.

Wells is also particularly exposed to potential rate cuts as Wall Street looks to build confidence in a 15% increase in return on tangible common equity (ROTCE) outlook, BofA said. These returns will likely materialize by 2026.

Adjusting buyback strategies

BofA is expecting updates on capital ratios and share buybacks after the Fed’s annual stress test showed big banks might need even more capital buffers to cushion them in case of a severe recession or failure.

When a firm buys back its stock, it’s returning money to shareholders and raising the value of its shares on the market.

Citigroup is projected to double its buybacks in the latter half of this year, bringing it to $1 billion per quarter, compared to $0.5 billion per quarter in the first half of 2024.

In the second-quarter, Citi gave investors a glimpse into the early results of it reorganization, which it capped off during the first three months of this year. It saw expenses decline 2% year-over-year, which it said was driven by the simplification.

The third-largest U.S. bank by assets embarked on its largest reorganization in almost two decades last September, splitting the bank into five interconnected business units. The reorganization, which was completed in March, was aimed at cutting costs and simplifying the bank’s structure in an effort to turn around the firm’s stock and financial performance to keep pace with its growing peers.

The bank ended up eliminating 7,000 positions, which is expected to generate $1.5 billion of annualized run rate expenses, Fraser told analysts in a call in April. The restructuring will save Citi a projected $2.5 billion in cumulative annualized run rate in the medium term, Fraser said.

BofA is forecasting $6 billion in buybacks at Wells Fargo during the second half of the year, down from $12 billion in the first six months. And it’s assuming that Goldman Sachs will have no buybacks to end the year, as the investment bank focuses on return on equity and balance sheet growth.