Market Story - What to expect from big banks earnings reports

The largest financial institutions in the US will publish their results for the fourth quarter of 2022 on Friday and at the beginning of next week. Taking into account pessimistic economic forecasts, one should not expect sensational surprises, however, there are several important aspects worth paying attention to.

Expected surprise -  profit decline

In the third quarter of 2022, most banks recorded a double-digit decline in profits and it seems that the fourth quarter is unlikely to be any different in this respect. The CEOs often talk about the upcoming recession and try to protect banks from the negative impact of potential loan defaults, as consumers are finding it increasingly difficult to pay installments and make ends meet. Optimism still prevails in the stock market, however the fundamentals are slowly starting to show a completely different picture and we will eventually feel the cost of high interest rates.

The consensus assumes that the total amount of loan loss provisions in the six largest US banks will amount to USD 5.7 billion, which will have a significant negative impact on profits. According to Refinitiv's estimates, profits are expected to decrease by 17% y/y.

Net profits of the six largest US banks (forecast VS current)

Who's afraid of the big bad FED, - Monetary policy as the main blessing and curse of banking sector

The FED still presents a rather hawkish approach when  it comes to  interest rates, but it is widely speculated that the scale of increases will be slower. Nevertheless, higher interest rates are boosting banks' net interest income.

According to Wedbush Securities analysts, interest income for the fourth quarter should increase by an average of 30%.  On the other hand, higher interest rates mean a higher risk of loan default. Therefore, this increase will be overshadowed by the loan loss provisions.

Investment banking in the red

The investment banking segment of US banks is expected to underperform again as IPO and other issuance and transaction volumes were weak in Q4.

According to the EY report, last year the volume of global IPOs decreased by 45% y/y, and proceeds from transactions fell by 61%. According to Dealogic data, Q4 investment banking revenue fell to USD 15.3 billion, down more than 50% compared to the same period in 2021.

Retail banking - savings decrease, debt on credit cards rises

Retail banking performance in Q4 will get most of the attention as strong employment figures and a stock market rally in the first week of January suggested retailers were still in good financial shape. However, long-term trends indicate that in 2023 consumers may find themselves against the wall. Retail banking units are observing a significant decrease in savings and an increase in credit card debt.

JP Morgan Asset Management's estimates indicate that inflation eats up consumers' savings at a dizzying pace. The US household savings surplus has fallen to $900 billion from $1.9 trillion at the beginning of last year.

According to data from the Federal Reserve Bank of New York, credit card balances increased by 15% y/y in Q3 2022, which is a 20-year high. Q4 balances are expected to increase even further as the holiday season has added pressure on consumers.

Bank CEO's remain cautious

Despite ongoing optimism on markets,  CEOs of major US banks are starting to take the threats of the coming recession more seriously. One should expect that after earnings reports for the latest quarter, top executives will probably reveal steps they will take to weather the coming storm. We will soon find out whether this storm will be just an ordinary, temporary phenomenon or a hurricane that will wipe out recent gains.

However, as the ancient Romans used to say, "hope for the best but prepare for the worst".