US bank stocks: What to expect from Q4 earnings season

When will US banks report Q4 2022 earnings?

US banks will kick-off the fourth quarter earnings season as usual on Friday January 13, when we will have results out from JPMorgan, Bank of America, Wells Fargo, Citigroup and the Bank of NY Mellon. That will be followed by updates from Morgan Stanley and Goldman Sachs on Tuesday January 17.

US banks: What to expect this earnings season

A new year brings a new earnings season that will be kicked off at the end of this week when a string of major US banks report fourth quarter earnings and set the stage for what to expect in 2023.

The interest rate environment remains favourable after the Federal Reserve said it will continue to raise rates and signalled they won’t start to come down until 2024. The latest nonfarm payrolls report out last week showed more additions than anticipated, which fuelled fears of a more hawkish Fed as the central bank has said that it needs employment to cool down to lower inflation. However, there were some bright spots considering wage growth eased and the services sector softened after the ISM Non-Manufacturing PMI for December contracted for the first time since May 2020. Markets are hoping that the combination of lower wage growth and a contracting services sector will allow the Fed to slow its pace of interest rate increases to 25bps (or less) next month.

Fed chair Jerome Powell warned last week that the Fed ‘welcome[s] the reduction in the monthly pace of price increase, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.’ As a result, interest rates are set to keep rising and continue to stoke fears about a possible recession.

Importantly, markets will be on the lookout for Powell’s comments during a panel discussion on Tuesday to examine his view on the latest economic data and how it impacts the path of rate hikes as well as the CPI data out on Thursday. Expectations are for a headline print of 6.5% versus the 7.1% year-on-year rise seen in November while core CPI is expected to fall to 5.7% from 6%.  Headline inflation has been moving lower since June when it reached a high of 9.1%, however the core number has been a bit stickier.

Rising rates will continue to improve net interest income and margins, although this will continue to be weighed down by lower non-interest income.

Investment banking remains challenging as the amount earned in fees from advising on deals and listings continues to suffer amid tough market conditions, which are also reducing demand for underwriting of new debt and equity raises. In trading, fixed-income will remain a tailwind but equities trading is still subdued. Wealth and investment management will contribute to growth, but many are seeing this slow (although some will perform better than others).

Meanwhile, banks continue to build loan loss provisions and net charge-offs amid the uncertain economic outlook, hitting the bottom-lines of banks.

Markets will also be keeping an eye on deposit and loan growth to gauge how businesses and consumers are shaping up in the current environment while watching commentary from management on how they feel the economy is performing. We could see some banks take more drastic action in response, with reports surfacing this morning that Goldman Sachs is preparing to layoff 3,000 workers as soon as this week.

US banks Q4 2022 earnings consensus

The result is expected to be a sharp drop in adjusted earnings in the fourth quarter. All major US banks are set to underperform the wider market, with the S&P 500 as a whole forecast to see earnings slide some 4.1% this quarter, according to FactSet. Notably, only Bank of NY Mellon is expected to grow its bottom-line this season.

(Source: Bloomberg consensus)

US banks: When will earnings return to growth?

Markets believe that we are approaching the trough for US bank earnings and that they will start to see their bottom lines grow again in 2023. However, some are expected to achieve this faster than others.

Bank of NY Mellon is expected to keep up the momentum and continue to increase adjusted EPS this year and deliver the second-best growth over 2023. JPMorgan, Wells Fargo and Bank of America are all forecast to see adjusted EPS return to growth in the first quarter, followed by Morgan Stanley and Goldman Sachs in the second. Citigroup is set to be the outlier and isn’t anticipated reporting higher EPS until the fourth quarter of 2023. Below is an outline of consensus figures to show how each bank is expected to perform in 2023 in terms of annual adjusted EPS:

(Source: Bloomberg consensus)

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