Banks’ first-quarter earnings will reflect strong consumers and weak equity markets (NYSE:BAC)

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Banks are once again gearing up to release their first quarter results, which will give investors and economists have a better understanding of the strengths and weaknesses of financial markets and systems. JPMorgan Chase (NYSE:JPM) and Black Rock (noir) will launch earnings reports on Wednesday.

Personal and commercial banking and higher interest rates will provide some support, while equity capital markets and reduced M&A activity should hurt earnings.

Rising prices:

Banks should see some improvement as interest rates started to climb in the quarter. Yet the Fed has only just begun its tightening cycle, so most of the benefits of a more hawkish Fed are yet to come. “We will have a lot of leverage” from the rate hike, Bank of America said (NYSE: BAC) CEO Brian Moynihan on CNBC less than three weeks into the first quarter.

Morgan Stanley analyst Betsy Graseck believes higher rates are likely to boost the outlook for consensus net interest income at many banks. She expects the main beneficiaries to be Wells Fargo (WFC), Bank of America (BAC) and SVB Financial (SIVB).

Consumer banking should help boost first-quarter earnings. And so far, rising inflation hasn’t dampened spending. At the start of the first quarter, BofA’s Moynihan said consumers were still spending. The bank’s consumer customers made $249 billion in payments in February, following a record $335 billion in payments in January.

“Fundamentals hold up well in the near term with better loan growth, rising net interest margins (NIM) and still strong credit quality – current weakness is in investment banking and other markets,” JP Morgan analyst Vivek Juneja wrote in a note. Consumer spending should also continue to recover.

Fees and lost revenue from exiting Russia are likely small at most banks compared to other issues, JP Morgan’s Juneja said. Citigroup (C) will be the most affected. In February, the bank disclosed a total exposure of $5.4 billion to Russia in the fourth quarter of 2021, making it the 21st of its top 25 country exposures.

Loan Growth:

On the positive side, lending activity increased in the first quarter, with the greatest strength in commercial real estate and consumer loans, including credit cards, auto loans and consumer revolving loans, Odeon Capital analyst Dick Bove said in a note to clients.

Morgan Stanley’s Graseck also points to accelerating loan growth, particularly in the commercial and industrial and card units. It names KeyCorp (KEY) and PNC Financial as best positioned for C&I lending and American Express (AXP) and Capital One Financial (COF) on the cards side.

On the negative side of the equation, equity market activity slowed significantly through mid-March. Data from Dealogic showed five of the biggest US banks – Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS) and Citigroup (C) together pulled in $645m ECM fees, down $5.3 billion in the same period of 2021, the FinancialTimes reported.

Cold M&A:

And with more volatile stock prices and runaway inflation, M&A activity has also slowed as buyers and sellers find it harder to agree on a price. The number of M&A deals in North America fell 16.7% year-on-year in February and the value of those deals fell 30% in the same month, according to data from S&P Global Market Intelligence.

Jefferies analyst Daniel Fannon cut first-quarter EPS estimates for Goldman (GS) by 13% to $8.53 (vs. consensus of $9.03) and for Morgan Stanley by 25% to 1 $.55 (against a consensus of $1.78). “Lower investment banking activity across the board drove most of the decline, along with lower asset and wealth management revenue given beta headwinds “, Fannon wrote in a note to clients. The increased market volatility, however, should help the fixed income commodities and currencies divisions, he added.

It remains to be seen whether banks begin to increase their loan loss reserves, a sign that they expect the US economy to slow or weaken. “A non-cash charge, loan loss reserves, is likely to drive earnings in the quarter, just as it has in the past eight,” Odeon’s Bove said. “That shouldn’t get investors excited, so bank stocks could continue to stagnate.”

Capital returns are slowing:

Morgan Stanley’s Graseck also expects capital returns to slow as two major factors hurt capital levels in the first quarter – accumulated other comprehensive income (“AOCI”) set to be hit by losses unrealized on banks’ AFS portfolios as rates rise; and higher value at risk for banks’ trading books due to high market volatility. The book value per share of trusted banks is most affected by AOCI risk, and money center banks will feel the effects of higher risk-weighted assets the most, she said.

Payout scale:

Wednesday April 13: JPMorgan Chase (JPM), BlackRock (BLK)
Thursday April 14: Ally Financial (ALLY), Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), PNC Financial (PNC), State Street (STT), US Bancorp (USB), Wells Fargo (WFC)
Monday April 18: Bank of America (BAC), Bank of New York Mellon (BK), Charles Schwab (SCHW) (estimate), Synchrony Financial (SYF)
Tuesday, April 19: Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), Truist Financial (TFC)
Wednesday April 20: Comerica (CMA), M&T Bancorporation (MTB)
Thursday April 21: Blackstone (BX), Huntington Bancorporation (HBAN), KeyCorp (KEY)
Friday April 22: American Express (AXP), Regions Financial (RF)
Tuesday April 26: Ares Management (ARES), Northern Trust (NTRS), Capital One Financial (COF)
Wednesday April 27: Bread Financial (BFH) (estimate), Discover Financial Services (DFS), New York Community Bancorporation (NYCB)
Thursday April 28: Carlyle Group (CG), T. Rowe Price
Tuesday, May 3: KKR (KKR) (estimate)
Thursday, May 5: Apollo Global Management (APO), Block (SQ)
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SA contributor Richard J. Parsons makes banking choices ahead of Q1 results

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