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The US big banks, including JPMorgan Chase, Citigroup, and Wells Fargo, are set to report their second-quarter earnings before the US markets open on 12 July. These flagship US lenders’ profit margins may have been squeezed by growing expectations for the Federal Reserve to commence rate cuts in the second half of the year. However, a recovery in deal making is expected to offset losses in commercial banking. According to FactSet, the earnings growth of US banks is projected to decline by 10% year on year in the second quarter.

Net interest income faces a headwind

Major US banks saw their profits decline in the first quarter due to rising funding costs as depositors switched to higher-yielding bank accounts. This trend is expected to continue negatively impacting banks’ performance in the second quarter. Slowing loan growth could be a significant factor affecting banks’ profits, especially for those that rely heavily on lending activities. As depositors gain higher interest rates, banks will need to reprice their loan rates and negotiate with customers. High interest rates and signs of a softening economy may significantly slow down loan growth, particularly in the commercial and real estate sectors. Potential rate cuts by the Fed in September and December may also lower banks’ interest income in the second half of the year.

Some US big banks have already lost momentum in the first quarter of 2024. Following a record profit in 2023, when rising interest rates and the takeover deal of First Republic boosted JPMorgan Chase’s net interest income (NII), the largest lender reported smaller-than-expected NII and provided disappointing guidance for 2024 in the first quarter.

CEO Jamie Dimon expressed concerns that war and persistent inflationary pressure threatened a positive economic backdrop. Chief Financial Officer Jeremy Barnum warned that its record NII might not have been sustainable previously. Wells Fargo also forecasted its NII to decline between 7% and 9% in 2024, following an 8% year on year drop in the first quarter.

Credit losses expected to grow

US banks are expected to set aside more money amid increasing economic risks. Analysts anticipate that loan loss provisions will rise to cover deteriorating loans, especially in the commercial real estate sector.

According to the Fed’s recent stress test on the 31 largest US banks, the commercial and industrial loan loss rates may increase to 8.1% in 2024 from 6.7% last year. The reserve bank found that high-quality capital in these banks would fall to 9.9% at its lowest level. Analysts predict that the four largest banks by deposits – JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo – will report loan provisions of $7 billion (€6.5 billion) in the second quarter, up more than 50% from last year.

Investment banking may experience positive growth

Despite the aforementioned negatives, there is a positive note: investment banking activities are expected to recover from last year, during which spiking interest rates restrained dealmaking and IPOs. A rebound in mergers and acquisitions (M&A) and IPOs has been driven by loosening liquidity as central banks halted rate hikes, with some already in a rate-cut cycle.

According to Bloomberg’s survey, analysts expected investment banking revenues at the big five banks, including JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup will rise 30% year on year on average in the second quarter.

The resurgence in dealmaking is expected to particularly benefit banks that are exposed to investment banking the most, such as Goldman Sachs and Morgan Stanley. JPMorgan Chase also indicated that its revenue increase from the division would rise to 30% in the second quarter. However, banks’ performance in investment banking is unlikely to return to their peak in 2021 and 2022, when interest rates were slashed to ultra-low due to the pandemic-induced economic recession.