US bank profits to shrink on interest income, focus shifts to Fed cuts

By Nupur Anand

NEW YORK (Reuters) -JPMorgan Chase and Wells Fargo kick off?earnings for the sector on Friday, and investors are expected to focus on the big banks' forecasts for net interest income after strong jobs data fueled uncertainty about the path of future Federal Reserve rate cuts.

Both banks are expected to report lower profits for the third quarter after interest income may shrink while loan demand remained subdued.

The sector reaped a windfall in net interest income (NII), or the difference between what they earn on loans and pay out for deposits, in recent years as the Fed raised rates.

"Weak loan growth, higher deposits, increase in loan loss provisions due to a higher unemployment rate -- all of this will result in pressure on margins and will moderately bring NII down," Stephen Biggar, banking analyst at Argus Research said.

Any additional rate cuts could shrink banks' income from interest payments, but also spur more borrowing and dealmaking.

"With our economists anticipating another 150 bps (basis points) of rate cuts by mid-2025 and expecting the U.S. economy to avoid a recession, we expect the focus to shift quickly to forward outlooks," Betsy Graseck, a banking analyst at Morgan Stanley, wrote in a report published on Sept. 30.

Investment banking divisions likely saw a pickup in activity in the third quarter as volumes rose in debt issuance, equity follow-on offerings and initial public offerings. Mergers and acquisitions remained muted, analysts said.

Oppenheimer forecast an average of 7% rise in investment banking revenues for all banks, a good increase but one that falls short of a rebound to historical levels.

Trading divisions likely got a boost from a resurgence in market volatility, but their revenue may still decline versus the second quarter given a typical seasonal slowdown in the third quarter, Moody's analysts wrote in a report.

While the weakness in office loans has been a source of industry concern for years, banks have set aside large reserves to cover potential losses, analysts said. C

Consumer loan delinquencies, meanwhile, are beginning to plateau as banks tighten underwriting in the wake of last year's banking crisis appears, industry executives have said in recent months.?

Here are key expectations for the six biggest U.S. banks:

JPMORGAN CHASE

The largest U.S. lender is expected to report a nearly 8% ?drop in its earnings per share, according to estimates compiled ?by LSEG, as its NII slides from the second quarter.?????

HSBC analyst Saul Martinez predicted NII would fall 1.2% from ?the second quarter as deposit margins shrink and loan growth ?stays subdued.?????

"While credit quality should remain healthy, loan loss ?reserve builds for credit card growth should also dampen ?earnings momentum," he added.????

BANK OF AMERICA

BofA's EPS is expected to drop by about 14% when it reports ?earnings on Oct. 15, estimates compiled by LSEG showed. NII is expected to remain under pressure, analysts said, while investment banking gains will likely be more modest than peers', as indicated by management.

CITIGROUP

Citigroup's EPS is projected to decline almost 20% on tepid revenue growth and as it sets aside more provisions to cover loan losses, Martinez said. The bank's expenses will probably increase, while its trading income is likely to dip. The bank is due to report earnings on Oct. 15. Executives will likely face questions about its compliance problems after it was fined $136 million in July.

WELLS FARGO

Wells Fargo's EPS will probably drop nearly 14%, weighed down by NII, UBS analysts said in a note. The bank's leaders will probably be quizzed about its progress toward fixing regulatory punishments after it received a fresh rebuke last month.

GOLDMAN SACHS

The Wall Street giant is likely to see a roughly 35% jump in EPS as investment banking improves when it reports results on Oct. 15, analysts said. However, trading revenue could fall 10%, CEO David Solomon cautioned last month.

MORGAN STANLEY? Morgan Stanley's EPS is expected to climb 14%, lifted by? rising activity in equity and capital markets, analysts at? Oppenheimer said.? "There is optimism on capital markets and investment banking? business doing better in the third-quarter which will boost? earnings for the Wall Street bank compared to their peers on? the main street banking side," said Chris Marinac, director of? research at financial adviser Janney Montgomery Scott.? "There has also been limited compensation growth which could? provide some operating leverage and boost earnings for Morgan? Stanley and Goldman," he added.? Morgan Stanley is due to report earnings on Oct. 16.

Bank EPS Q3 EPS Q3

2024 2023

Estimates?

?????

JPMorgan 4.00 4.33

Bank of 0.77 0.90

America

Citigroup 1.30 1.63

Wells 1.28 1.48

Fargo

Goldman 7.36 5.47

Sachs

Morgan 1.58 1.38

Stanley

Source: Mean estimates compiled by LSEG??

(Reporting by Nupur Anand; Editing by Lananh Nguyen and Anna Driver)