Analysts anticipate the biggest U.S. banking companies will collectively report modest third-quarter lending gains and lower trading revenue. But the Street also expects a majority of them to post increased interest income, contained costs and earnings advances.
Analysts on average expect 14 of the companies to post third-quarter revenue that is up from the previous quarter, according to an S&P Global Market Intelligence analysis, which covered the 20 largest U.S. banks and thrifts by assets. The Street expects net interest margin advances at 16 of these lenders, the product in part of recent interest rate hikes. Margin gains could bolster the top lines.
"I think interest rates and margins are going to be key," Keefe Bruyette & Woods analyst Brady Gailey said in an interview.
Big-bank earnings season gets rolling Oct. 12 with reports from JPMorgan Chase & Co. and Citigroup Inc. Wells Fargo & Co. and Bank of America Corp., among others, follow the next day.
The Federal Reserve lifted its benchmark rate late in 2016 and then followed that move with two more rate bumps earlier this year. The increases helped many big banks boost the interest they earned on lending, helping their margins expand in the second quarter. Analysts say many of the largest banks likely continued to benefit from the rate increases during the third quarter.
The S&P Global analysis showed that analysts look for 14 of the 20 companies to report third-quarter earnings per share figures that are up when compared with the previous quarter. The Street sees 18 of the big banks posting EPS gains from a year earlier.
U.S. Bancorp's third-quarter experience encapsulates much of what analysts expect to see from the big banks. While speaking at an investor conference in September, President and CEO Andrew Cecere said the pace of the Minneapolis-based bank's loan growth slowed to a trickle during the third quarter — likely less than the 0.9% sequential growth it posted for the previous quarter — with commercial clients delaying plans to borrow and invest in expansion plans until they can feel more confident about federal lawmakers' ability to cut corporate tax rates.
"For the larger banks, I think you will see some disappointment on loan growth," Gailey said.
At the September conference, Cecere echoed several other big banks in noting that he also expects U.S. Bancorp's third-quarter trading revenues to be lower than they were in the previous quarter, thanks to a relatively slow August.
But, he said, modest loan growth coupled with continued benefit from higher rates should help the bank's NIM. He said U.S. Bancorp would show margin expansion of about 5 basis points during the third quarter. That, he said, should provide a lift to interest income, revenue and ultimately the bottom line. Analysts on average expect U.S. Bancorp to report top- and bottom-line improvement when compared to the previous quarter and a year earlier.
Analyst John Rodis of FIG Partners said in an interview that he expects to see a similar performance for the banking sector broadly: low single-digit loan growth but the realistic possibility for continued NIM advances that could prop up interest income.
Rodis also sees overall continued strength on the credit quality front. While charge-offs and provisions for loan losses may creep up broadly — and potentially notably for banks with big exposure to markets in Florida, Texas and Puerto Rico that were hammered by recent hurricanes — costs tied to credit deterioration are coming off of multi-year lows, he noted. As such, most banks should have little to worry about when it comes to credit costs.
Analysts on average expect most of the 20 largest banking companies to report higher levels of net charge-offs to average loans and higher provisions for the third quarter.
"You may see provisions move up, but I don't see any big issues on credit," Rodis said.
Rodis also noted that, despite uncertainty in Washington, both analysts and investors are likely to seek bankers' outlooks on macroeconomic conditions, cost benefits and loan demand in the event of lawmakers' finding a way to cut taxes. A recent White House plan calls for reducing the corporate tax rate from 35% to 20%.
"That kind of change could really be big for the banks," Rodis said. "So I think a lot of people will look past this round of earnings and look for color on the potential for coming quarters."
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