Big banks poised for weaker Q3 earnings as funding costs ramp up

Big bank earnings reports for the third quarter are set to show damage from higher funding costs and worries about credit deterioration, with expectations that the negative dynamics will keep weighing on stock prices across the sector.

Among the 15 largest publicly traded banks in the US, 13 are forecast to post sequential EPS declines, according to consensus analyst estimates compiled by S&P Global Market Intelligence. All are projected to post lower net interest margins (NIMs) and 14 are projected to post revenue declines.

Bank stocks have sharply underperformed the broader market this year after a swoon in March when deposit runs led to three large failures. The group closed the gap after second-quarter earnings reports that showed a recovery from the turbulence, but subsequently retreated once more as long-term interest rates continued to climb rapidly.

"Our hope is that sentiment has again gotten so downbeat that there could be some relief in a 'not that bad' earnings season," Piper Sandler analyst R. Scott Siefers said in a note Oct. 6. However, "it is tough to outline a really constructive case for the group in the [near term] outside of valuation."

Revenue pressures

In addition to contracting NIMs, net interest income is under pressure from sluggish loan growth and balance sheets that have been contracting overall as the pandemic surge in deposits has ebbed.

Thirteen of the big banks are projected to post sequential declines in net interest income in the third quarter, according to analyst estimates, with JPMorgan Chase & Co. and Bank of America Corp. the two exceptions.

Keefe Bruyette & Woods analyst David Konrad flagged JPMorgan Chase as a candidate for "another beat-and-raise quarter," in part because of potential outperformance on net interest income.

In early September, CEO Jamie Dimon said the bank's net interest income "could be a little better" than its latest guidance of about $87 billion for the full year. So far, the bank has consistently lifted its net interest income forecast for 2023 from a starting point of about $73 billion.

Broadly, however, it is unlikely that bank executives "can say anything that will allay investor trepidation around owning bank stocks, given the persistent downside risks to EPS," BofA Global Research analyst Ebrahim Poonawala said in a note Oct. 10.

Credit jitters

Fears over deteriorating credit performance are also a major overhang for banks, though analyst projections for increases in net charge-offs (NCOs) and nonperforming assets in the third quarter are mild.

For credit provisions — the expense banks recognize to cover NCOs during a given period and potentially to add to allowances because of loan growth or a deterioration in the outlook — consensus estimates are a mixed bag. Analysts expect sequential increases in provisions at seven of the big banks and declines at eight.

Despite the emergence of some large charge-offs during the quarter and the burden that higher interest rates put on borrowers, broad economic conditions like employment remain strong.

Still, analysts see credit as a principal concern. "We see higher credit costs as a second key driver to reduced estimates," after lower net interest income, Raymond James analysts said in a note Oct. 5.