Here’s what bank stock investors need to know ahead of Q4 results
It’s been a confusing time for investors in bank stocks. The industry got what it wanted last year — higher interest rates, courtesy of the Federal Reserve — but bank stocks were still weighed down by recession fears. This year, bank stocks have rallied on hopes of an economic soft landing that would help them avoid a spate of profit-crushing loan defaults. The 24-company KBW Bank Index is up 5.3% so far, compared with a 24% decline in 2022. Analysts expect a mixed bag of conflicting trends when four of the largest US banks report fourth-quarter results on Friday announce. Higher interest rates will help companies earn more interest income, but some of that increase will be offset by higher provisions for expected credit losses when the economy slows. As a result, analysts are torn between whether now is the right time to invest in banking stocks or whether it’s better to wait until the industry has given the all-clear. As a guide to the sector’s direction, here are four key metrics to consider: Net Interest Income Net interest income (NII), a key driver of bank earnings, should continue to rise in the fourth quarter, JPMorgan analyst Vivek Juneja said in a Jan. 6 note. According to the analyst, the NII is expected to rise about 5% on average over the course of the third quarter, thanks to higher interest rates and credit growth. But the future path of this crucial yardstick worries investors most. How much further the Fed will hike rates and how long they will be kept high before a potential turnaround are all factors. Investors fear NII growth will falter later this year as credit growth slows and funding costs rise due to competition for deposits. “Our continued cautious view … reflects ongoing macro risks and likely weakening bank fundamentals — including spikes in net interest margins,” Deutsche Bank analyst Matt O’Connor said in a Jan. 5 note. Reserves Recent changes in accounting rules have required banks to reserve for loan losses when anticipating a turnaround in the economy. The result is that banks feel the effects of an impending recession before borrowers default. Morgan Stanley analyst Betsy Graseck thinks loan loss provisions for every major bank it covers will be higher than expected, according to a Jan. 6 note. This is informed in part by her tracking of filings from the credit card industry that show late payments are increasing so rapidly since the 2008 financial crisis, she wrote. “With most U.S. economists forecasting either a recession or a significant slowdown this year, banks are likely to include more severe economic prospects in their scenario planning,” Graseck wrote. Wall Street investment banking fees will end a tough year at low levels compared to a year ago when the market was booming. Earnings are expected to fall 50% amid frozen IPO markets and subdued deal activity, Barclays analyst Jason Goldberg wrote in a Jan. 11 note. This is partially offset by a 10% increase in trading income thanks to a boost from the fixed income business, Goldberg wrote. Finally, lower average levels in stock and bond markets will put pressure on wealth management fees, he added. The Outlook Investors tend to discount fourth quarter results in favor of management’s statements on their outlook for the coming year. That’s why conference calls with bank executives will be crucial for investors to spot changes in forward guidance on metrics like reserves, net interest income, share buybacks, and expectations for investment banking, trading, and lending in 2023. “While Q4 earnings should be decent, we remain cautious about commenting on the outlook and overall earnings trends,” JPMorgan’s Juneja wrote in its note Likely to put markets under pressure in the medium term.” Of particular interest is the guidance on spending amid fears that wage inflation will force banks to grapple with rising costs while earnings could fall. “We expect that Above-consensus spending guidance is likely to weigh on bank stocks during Q4’22 results as management announces its budget plans for 2023,” Graseck said. — CNBC’s Michael Bloom contributed to the coverage
https://www.cnbc.com/2023/01/12/heres-what-bank-stock-investors-need-to-know-ahead-of-q4-earnings-.html Here’s what bank stock investors need to know ahead of Q4 results
