As the Federal Reserve continues to raise rates, banks would be expected to see their net interest income rise in Q4 2022. But the earnings impact from higher rates isn't quite that simple. As rates rise, so do banks' costs on deposits. In addition, the increased cost of money has put a damper on new stock and debt issues as well as mergers and acquisitions, businesses where Wall Street banks that traditionally earned hefty fees.
Taking a broader view, the Fed's aggressive tightening raises the risk that the economy will fall into a recession. The inverted yield curve warns of such an outcome. With the dimmer economic outlook, banks are bracing by increasing their reserves for expected losses as credit quality typically suffers during economic downturns.
And with inflation raising wages and other costs, the estimates for banks' Q4 earnings are mostly lower than the year-ago results, according to Wall Street consensus estimates, as seen in the table below. Analysts have also been lowering their earnings estimates for Q4 more than they've been increasing them.
A crop of Wall Street heavyweights report Q4 earnings on Friday: JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC). Also ETF behemoth BlackRock (NYSE:BLK) and trust bank Bank of New York Mellon (NYSE:BK).
Morgan Stanley analyst Betsy Graseck forecasts that reserve ratios will increase by median 4 basis points Q/Q, "with provisions above the Street for every large cap bank that we cover."
Due to inflation, she also expects large cap banks to guide to 2023 median expense growth of ~4% above consensus of 3%, noting that "fully 55%" of bank expenses are personnel costs.
Banks sensitive to the front end of the yield curve could produce NII surprises, Graseck said. Banks that she prefers going into Q4 earning season are: Wells Fargo (WFC), JPMorgan Chase (JPM), and Northern Trust (NASDAQ:NTRS).
Wells Fargo analyst named Bank of America (BAC) as his top pick ahead of earnings on expectations that "the onslaught of higher rates leads to greater NII growth, more business volume demonstrates model scalability, and slower economic growth further proves BAC's resiliency after years of de-risking."
Deutsche Bank Matt O'Connor recently downgraded Bank of America (BAC) and JPMorgan (JPM) to Hold from Buy on "macros risks and likely weakening bank fundamentals." Concerns include: peaking NIM, likely slowdown in loan growth, rising credit costs and limited excess capital for stock buybacks.
The analyst upgraded regional bank PNC Financial (NYSE:PNC) to Buy, calling it one of the most defensive names.
Wedbush analyst David Chiaverini, who covers regional and midcap banks, is more cautious. Q4 earnings "should be decent for most banks" as higher rates and loan growth continue to bolster NII, "but positive momentum may be starting to fade."
"We expect deposit headwinds in 4Q to continue with continued outflows, and we expect headwinds on fee income including weak mortgage banking and pressure on capital markets revenue as investment management fees, trust fees and investment banking revenue could all be weak given the equity market declines, lack of capital raising, and lack of M&A deal activity," he wrote.
For Q4, BlackRock (BLK) is expected to earn $8.08 per share vs. $9.55 in Q3 and $10.42 in Q4 2021. In the past 12 quarters, the company has beat EPS consensus all but one of them, missing in Q2 2022.
SA contributor Richard J. Parsons provides his Q4 analyst EPS estimate cheat sheet.
|Q4 EPS consensus||Y/Y change||Consensus revision trends|
|Bank of America||BAC||$0.77||-6.40%||-5.74%||-10.50%||-11.65%|
|Bank of New York Mellon||BK||$1.24||19.30%||3.47%||8.59%||4.95%|
|Fifth Third Bancorp||NASDAQ:FITB||$1.00||8.03%||-1.18%||-1.21%||-6.52%|