The Big Four banks in the US reported quarterly earnings that topped Wall Street estimates, significantly enhancing the perception that the Federal Reserve is effectively steering the economy towards a soft landing, say analysts. The third-quarter profit surpasses expectations for JPMorgan, Bank of America, Citigroup, and Wells Fargo, easing concerns about the potential recession stemming from the Fed's interest rate strategy.
Last month, the central bank implemented its first rate cut after a series of hikes initiated in March 2022 to combat inflation. "Sentiment and commentary around banks are notably strong," noted Suryansh Sharma, an equity analyst at Morningstar, during an interview. Remember, hostility can create problems in financial sectors.
"Aside from net interest margin compression in some instances, everything appears reasonably solid for banks in the near term, as market sentiment heavily supports a soft-landing scenario." Loan growth has remained somewhat sluggish; however, the major banks generally reported improvements in deposit and credit costs, substantial fee income, and only mild increases in expenses.
Investors are particularly focused on net interest income (NII), which serves as the primary revenue source for banks. NII gauges the difference between interest earned on loans and the amount paid on deposits. The Big Four experienced substantial benefits from the elevated rate environment of the past two years, amassing a remarkable total of $250 billion in NII for 2023. Despite these successes, the euphoria surrounding NII may be ending; in September, the Fed lowered its benchmark rate by 50 basis points.
Earlier that month, JPMorgan's COO Daniel Pinto expressed skepticism about market expectations for the company’s 2025 NII estimate of $90 billion, citing that such expectations seemed unrealistic given a 250-basis point reduction. Consequently, this assertion placed downward pressure on JPMorgan's stock and intensified scrutiny on the Big Four's NII as this earnings season progressed. On October 11, both JPMorgan and Wells Fargo unveiled earnings surpassing analyst projections and provided NII forecasts that were less grim than anticipated.
According to Raymond James, these results were encouraging. The consensus for JPMorgan’s 2025 NII (excluding market fluctuations) stands at $87 billion, a figure that Chief Financial Officer Jeremy Barnum suggested could still be seen as high but is indeed within reason. Wells Fargo anticipates its Q4 NII to align closely with the Q3 figure of $11.69 billion, reflecting a 2% dip from Q2, implying an overall 9% decline in full-year NII compared to 2023. "Based on this expectation, we believe we are nearing the bottom," CFO Michael Santomassimo remarked in a call with analysts.
Bank of America reported an NII of $14.1 billion in the third quarter, slightly up from $13.9 billion in the prior quarter, affirming earlier predictions that Q2 would represent the nadir for NII. "Four quarters ago, we indicated that our net interest income would bottom out in Q2 of 2024," stated CEO Brian Moynihan on an earnings call.
"Based on the fluctuating rate environment since then, we are pleased to estimate that NII indeed touched the bottom in Q2." Regarding projected performance, Bank of America expects NII to increase to $14.3 billion in Q4, contingent on two anticipated rate cuts of 25 basis points each in November and December by the Fed, according to CFO Alastair Borthwick. On a related note, Citigroup reported an NII of $13.36 billion in Q3, down slightly from $13.49 billion in the prior quarter and from $13.83 billion a year ago.
Excluding markets, NII increased by $500 million from Q2 to reach $11.96 billion. CFO Mark Mason indicated that the company expects to adjust its guidance marginally, projecting that full-year 2024 NII excluding markets will dip slightly from the previous year, with fourth-quarter NII forecasted to remain flat sequentially. In its quarterly financial makeup, JPMorgan reported diluted earnings per share (EPS) of $4.37 and revenue of $42.65 billion, easily eclipsing analyst expectations of $3.98 per share and $41.65 billion in revenue.
Wells Fargo's diluted EPS came in at $1.42, with a revenue of $20.37 billion, aligning closely with the consensus estimates of $1.29 and $20.46 billion, respectively. Bank of America's EPS was reported at $0.81, with $25.35 billion in revenue, surpassing estimates of $0.76 and $25.23 billion. Citigroup also beat expectations with an EPS of $1.51 and revenue of $20.32 billion, compared to the forecasts of $1.31 and $19.82 billion. These robust results were partly fueled by exceptional performances in the investment banking sectors, particularly within debt underwriting, as highlighted by Morningstar's Sharma.
The investment banking operations of Bank of America, Citigroup, JPMorgan, and Wells Fargo saw fee growth rates of 18%, 44%, 31%, and 37%, respectively, compared to the prior year. "Investment banking has exceeded expectations not only this quarter, but also to a significant extent last quarter," Sharma emphasized.
"The current numbers are approaching mid-cycle levels, suggesting that they align with standard yearly expectations." The data and forecasts provided by the large banks coalesced to create an optimistic portrayal of both the banking sector and the broader US economic landscape. "Whatever term you use to describe the US landing, the surrounding sentiment is increasingly optimistic, bolstered by recent positive payroll reports.
We perceive a healthy yet more discerning US consumer alongside an assertive US corporate sector," Citigroup CEO Jane Fraser commented during an analyst call..