US bank profits set to rise on higher rates while Wall Street lags

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Companies Bank of America Corp Follow Citigroup Inc Follow Goldman Sachs Group Inc Follow Show more companies NEW YORK, Oct 10 (Reuters) – The biggest U.S. consumer lenders are set to post higher profits for the third quarter, in contrast with investment banks still facing a dealmaking slump, analysts said. JPMorgan Chase (JPM.N), which kicks off earnings for big U.S. lenders on Friday, will set the tone for large banks. It is predicted to post a roughly 25% jump in earnings per share (EPS) versus a year earlier, LSEG estimates showed. Goldman Sachs (GS.N) and Citigroup (C.N) are expected to report the biggest EPS declines of 35% and 26% respectively, according to LSEG estimates. Morgan Stanley’s (MS.N) EPS is also forecast to drop. “This quarter is all about higher interest rates for longer,” said Mike Mayo, an analyst at Wells Fargo. “They will affect banks’ funding, lending, ability of borrowers to repay loans, losses in securities and capital requirements.” JPMorgan, the nation’s largest lender, is “best positioned” to handle higher rates and could surprise markets with stronger-than expected results, said Bank of America analyst Ebrahim Poonawala, who raised his earnings estimate. U.S. employers added 336,000 positions in September in a return to the fevered hiring seen during the pandemic, potentially bolstering the case for another interest rate increase by the Federal Reserve. Another hike, and the persistence of elevated borrowing costs, could pour cold water on a nascent recovery in dealmaking. Wall Street CEOs have cited the return of some initial public offerings, including for SoftBank’s Arm Holdings , as signs of a market revival after months in the doldrums. The outbreak of war in Israel could further dampen market sentiment. “There is a constructive environment, and investment banking fees tend to be higher through the end of the year,” said Jason Goldberg, a banking analyst at Barclays. A broader improvement for capital markets may not come until 2024, he said. Despite the renewed optimism, investment banking activity remains depressed. Global investment banking fees are down almost 17% in the third quarter from the same period a year earlier, to $15.2 billion, according to data from Dealogic. Markets could be further shaken by surging U.S. Treasury yields, knocking investor confidence and posing some risks to banks that hold a large volumes of the securities on their books. As rates rise, bond prices fall, representing losses on paper that would be realized if the banks sold the bonds. After Silicon Valley Bank collapsed in March partly because of losses from its securities portfolio, investors have focused on the risks posed by paper losses on bond holdings across the industry. Unrealized losses from securities will show a “significant increase” to as much as $670 billion across the industry in the third quarter, estimated Richard Ramsden, a banking analyst at Goldman Sachs. That compares with $558 billion in the second quarter, according to data from the Federal Deposit Insurance Corporation. For instance, Bank of America had more than $100 billion of unrealized losses on its securities portfolio that it aims to own until maturity, which have weighed on its shares. Its stock is the worst performer among the top six U.S. lenders, falling nearly 18% so far this year. The KBW index of bank shares, which includes regional lenders, has dropped almost 23% in 2023. Reuters Graphics Earnings from regional lenders will also remain in focus after a trio of bank failures earlier this year roiled the industry. “Investors should be very careful with the regional banks, which have more ties to the fragile commercial real estate loan market and some regional banks have weaker balance sheets, which is concerning,” wrote James Demmert, chief investment officer of Main Street Research, which manages about $2 billion in assets. Large banks’ consumer divisions are expected to remain a bright spot in their earnings. The strong job market has propped up household spending, although the pace of purchases has slowed, bank executives have noted in recent weeks. Consumer delinquencies on loan payments have also picked up, but remain at low levels historically. “It’s still credit normalization, as opposed to a real concern about credit losses getting to recessionary type levels,” Ramsden said. More broadly, “we’re back into this environment where investors think interest rates are going to remain higher for longer,” he said. EPS ESTIMATES FOR THIRD QUARTER * Median estimate. Source: LSEG Read Next Worldcategory Moody’s downgrades five Egyptian banks by one notch – note 12:55 PM UTC · Updated ago article with gallery Businesscategory Insurer Humana’s longtime CEO Broussard to step down next year 12:41 PM UTC · Updated ago article with video Legalcategory GSK settles another California lawsuit on heartburn drug Zantac 12:25 PM UTC Marketscategory Nigerian oil regulator ‘optimistic’ on Exxon asset sale to Seplat 11:01 AM UTC Reporting by Tatiana Bautzer and Saeed Azhar in New York and Niket Nishant in Bengaluru; Editing by Lananh Nguyen, Nick Zieminski and Jonathan Oatis Our Standards: The Thomson Reuters Trust Principles. Acquire Licensing Rights, opens new tab Tatiana Bautzer Thomson Reuters Tatiana Bautzer is a U.S. banking correspondent at Reuters in New York. She previously covered banks in Brazil, breaking news on deals by major global corporations, initial public offerings and bankruptcies. She has also delved into corruption scandals at Brazilian conglomerates and business disputes between billionaires. Prior to joining Reuters in 2015, Bautzer worked for business magazines Exame and Istoe Dinheiro and newspapers Valor Economico and O Estado de S. Paulo. She previously served as international correspondent for Valor Economico in Washington, D.C., covering multilateral institutions and trade. Bautzer holds a B.A. in Journalism and an MBA from the University of Sao Paulo. Contact: +646-2397968 Saeed Azhar Thomson Reuters Saeed Azhar is a Reuters financial journalist and part of the U.S. banking team, which covers Wall Street biggest banks. He focuses on Goldman Sachs and Bank of America, and also writes about regional banks. Before moving to New York in July 2022, he led the finance team in the Middle East from Dubai, and also worked in Singapore, covering Southeast Asia finance. Contact: +1-3479086341 Niket Nishant Thomson Reuters Niket Nishant reports on breaking news and the quarterly earnings of Wall Street’s largest banks, card companies, financial technology upstarts and asset managers. He also covers the biggest IPOs on U.S. exchanges, and late-stage venture capital funding alongside news and regulatory developments in the cryptocurrency industry. His writing appears on the finance, business, markets and future of money sections of the website. He did his post-graduation from the Indian Institute of Journalism and New Media (IIJNM) in Bengaluru.

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