Bank investor sentiment fragile as rates shift ahead of Q1 2024 earnings reports

Another abrupt shift in interest rates has investors looking to bank earnings reports for updates on net interest income outlooks and clues about how costlier debt for borrowers might impact credit performance.

For the quarter, consensus analyst forecasts anticipate further pressure on net interest income (NII) at big US banks, offset by sequential declines in loan loss provisions, according to data from S&P Global Market Intelligence. Overall, analysts project sequential declines in earnings per share at eight of the 15 publicly traded banks with more than $100 billion of assets.

Large banks have weathered the changes in the rate picture so far this year relatively well, with the KBW Nasdaq Bank Index, which comprises banks approaching the $100 billion-asset threshold and up, gaining 4.5% as of April 10, compared with a 12.8% decline in the KBW Nasdaq Regional Banking Index. NII at banks such as Bank of America Corp. and Wells Fargo & Co. is poised to benefit from higher-for-longer rates, and big banks generally have comparatively low exposure to worries about credit performance in the commercial real estate sector.

Still, investor sentiment on banks remains subject to abrupt shifts, analysts say. Credit losses at New York Community Bancorp Inc. were a "shot across the bow for the industry and a not-so-subtle reminder of the fragility of investor sentiment, even a year removed from the March 2023 banking crisis," analysts at Keefe Bruyette & Woods said in a note on April 4.

"Higher rates have weighed on investor sentiment given potential downside EPS risks in a hard landing [or] stagflation scenario," BofA Global Research analyst Ebrahim Poonawala said in a note April 8, though confidence "that NII could rebound this year and that credit losses should stay manageable (normalizing not spiking) could change investor attitudes as far as perceived risk in a higher for longer backdrop."

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Revenue expectations

Consensus forecasts for sequential declines in NII at all of the 15 big banks feed into projections for sequential declines in revenue at all except for JPMorgan Chase & Co., Bank of America, Citigroup Inc. and Huntington Bancshares Inc., which are among the banks that analysts expect to benefit from a revival in investment banking activity, particularly in debt markets.

At JPMorgan Chase, analysts are on the lookout for another "beat-and-raise" report, though the analysts at KBW said the "over-owned stock" would have to deliver a meaningful increase to its current projection for about $90 billion of NII in 2024 to meet investor expectations approaching $92 billion.

For big regional banks, most of which have more than $100 billion of assets, Piper Sandler analyst R. Scott Siefers said that investors are generally confident the group will hit previous guidance while parsing the details.

"Whereas the universals broadly are perceived to have very conservative NII guides that could be boosted," Siefers said in an April 10 note, "the focus for the large regionals is squarely on the nuance within existing NII guidance ranges."

Sticking the landing

Consensus projections anticipate sequential declines in loan loss provisions at 11 of the big banks and increases at four.

The declines include New York Community, though the consensus has still penciled in another credit hit for the bank with a projected provision expense of $302.5 million. New York Community's provision was $552.0 million in the fourth quarter of 2023 and $170.0 million in the 2023 first quarter.

The Keefe Bruyette & Woods analysts expect that New York Community will cast a shadow on other banks with large commercial real estate exposures for some time, though they observed that concentrations for other large banks are generally small. The analysts calculated that 10% of loans at banks with more than $100 billion of assets are commercial real estate, compared with more than 40% of banks with assets of less than $10 billion.

Broadly, "credit costs should likely remain manageable," they said.