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(Bloomberg) – Bank stocks, fresh off their best quarter since 2021, are in a high-stakes earnings showdown as Wall Street’s most influential executives give investors their latest thoughts on the U.S. economy. is being prepared for.
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JPMorgan Chase & Co., Bank of America, Citigroup and Wells Fargo ended their U.S. corporate reporting cycles on Friday after U.S. bank stocks rose 23% last quarter, overwhelming the broader market. It started.
Bank stocks had been under pressure through much of 2023, but have soared since late October on growing confidence that the U.S. Federal Reserve will end its interest rate hike campaign without triggering a recession. The timing of policy easing is now in focus, with investors scrutinizing what it means for all aspects of a financial institution’s business, from the health of its loan portfolio to the outlook for deposit rates. Become.
“Bank stock prices are obviously not as cheap as they used to be, but at the same time I don’t think people think banks are undervalued,” said Richard Ramsden, an analyst at Goldman Sachs Group. said.
If banks are more optimistic than expected in terms of net interest income, loan growth, capital markets, and deposit pricing, “all of that will obviously be reflected in earnings expansion, and perhaps some banks’ relative outperformance.” It’s going to increase my form even more,” Lumsden said.
The KBW Bank Index fell about 1% on Thursday, underperforming the broader market, which ended the day largely unchanged.
Read more: Top US banks eager to ease interest rate pressure after Fed rate hike
On Tuesday, all eyes will be on the earnings of Morgan Stanley and Goldman Sachs. This day also marks a bellwether day for regional lenders as the first results from regional lenders are released, reported by PNC Financial Services Group.
Large banks are generally expected to report difficult results even in the fourth quarter due to rising funding costs. Goldman’s Lumsden said in a note that the sector’s net interest income is expected to decline, and higher expenses and weaker trading income are also likely to weigh on earnings. He said loan growth would likely be moderate.
The companies also plan to reveal details of payments made to the Federal Deposit Insurance Corp. following local bank failures that roiled financial markets early last year. Citigroup announced Wednesday that it expects to incur a $1.7 billion charge to replenish the FDIC fund. Meanwhile, Bank of America announced that it would incur $1.6 billion in fees related to the LIBOR transition.
the turn of the tide
The tide turned for bank stocks last quarter as expectations that the Federal Reserve would cut interest rates in 2024 eased concerns about areas such as net interest margins.
“Most large bank stocks posted strong gains at the end of the year, but this is because recession risks have significantly reduced, so profitability will not take a major hit,” said David Bianco, chief investment officer for the Americas at DWS. “I’m encouraged by the optimism surrounding deaf people.” group. “The risk that large banks will be forced to take large loan loss provisions or write down securities is now much lower.”
There are many reasons to be cautious. Inflation remains well above the Fed’s target, and markets are betting on a more aggressive rate cut than the Fed has indicated. JPMorgan Chief Executive Jamie Dimon said this week he remains skeptical that the Fed’s interest rate hikes will ultimately succeed in curbing inflation without hurting the economy.
Some analysts are advising investors to temper their enthusiasm.
BMO Capital Markets’ James Fotheringham downgraded several U.S. banks and specialty finance companies on the back of the rally, warning they were vulnerable to an “imminent” credit cycle. Meanwhile, analysts at UBS Group AG pointed to the risk of “severe swings in sentiment.”
“The January earnings season could accelerate the sector’s recent momentum,” Erika Najarian of UBS wrote in a note this week.
Hedge funds have sold the financial sector on average over the past four weeks, with average weekly outflows of $200 million, according to data compiled by Bank of America, while institutional investors and retail clients have also sold. It was over.
Still, more broadly, only financial companies have seen the majority of analyst earnings revisions upward in the past month, according to Citigroup data.
DWS’ Bianco said he maintains an overweight position in large banks such as JPMorgan, Bank of America, Citigroup and Wells Fargo because of their strong profitability. He said credit was stable, offsetting weak global transaction fees, and a rise in initial public offerings (IPOs) brightened the outlook.
—With assistance from Elena Popina.
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