US bank profits to climb on stronger trading, investment banking

[NEW YORK] Major US banks are expected to report stronger profits next week, driven by buoyant trading and a modest rebound in investment banking.

When JPMorgan Chase, Citigroup and Wells Fargo kick off second-quarter earnings on Tuesday (Jul 15), investors will focus on their outlooks at a time when economic uncertainty over US tariff policies remains high.

“Things are looking good and we expect that most banks will beat expectations,” said Stephen Biggar, a banking analyst at Argus Research. “It is one of those quarters where no big surprises are expected and we are likely to see a continuation of trends.”

Investment banking activity has picked up in the second half of this quarter, and dealmakers are more optimistic about the rest of the year. That marks a turnaround from April, when an escalating trade war and geopolitical tensions derailed confidence and drove mergers and acquisitions to a 20-year low that month.

Betsy Graseck, a banking analyst at Morgan Stanley, wrote in a report last week: “We expect second-quarter investment banking revenues to be better than expected and management teams to point to pipelines building.”

Amid the market turmoil, Bank of America and Citigroup executives said last month that they expected market revenue to climb by mid-to-high single digit percentages in the second quarter. Analysts at Goldman Sachs, meanwhile, said they “continue to expect the trading revenue to remain buoyant in the near future given the uncertain macroeconomic and geopolitical backdrop”.

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Most of the major banks are expected to report a low-to-mid single digit percentage gain in net interest income (NII), or the difference between what they earn on loans and pay out for deposits. Lenders are also expected to set aside smaller amounts for potential souring loans, as the financial health of consumers and businesses remains resilient.

Credit quality among consumer and commercial borrowers is still robust, and even though loan demand is muted, it is starting to improve, analysts say.

“One of the biggest questions is: how sustainable is this loan growth,” said Mike Mayo, an analyst at Wells Fargo. He sees industry loan growth rising to around 5 per cent, higher than earlier estimates of 3 per cent.

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Banks are also expected to benefit from the deregulatory regime under US President Donald Trump. Lenders recently aced the Federal Reserve’s stress test and showed enough capital to withstand possible adverse scenarios. Investors will likely scrutinise banks’ plans to deploy excess capital after the lenders hiked dividends and some announced share buyback plans.

Here is what is likely to come from the six biggest US lenders.

JPMorgan Chase

The largest US lender is predicted to report a 5 per cent increase in earnings per share (EPS), according to estimates compiled by LSEG. Investors will take note of the bank’s outlook on NII, loan growth and investment banking.

Analysts are also watching for any developments in its work on stablecoins.

Bank of America (BOA)

BOA’s EPS is likely to inch up nearly 4 per cent when it reports earnings on July 16, LSEG estimates showed. NII is estimated to be higher by nearly 7 per cent.

However, its investment banking fees are forecast to slide to about US$1.2 billion, according to management commentary.

Citigroup

Analysts see Citigroup’s EPS improving by 5 per cent, fuelled by capital markets. Expenses and provisions may also exceed earlier estimates, Wells Fargo’s Mayo said. Citi is his top pick.

Wells Fargo

Operating expenses will decrease slightly because of shrinking personnel costs, analysts at Raymond James said. Loan loss provisions are expected to remain flat versus the first quarter, while loan balances are expected to increase slightly, analysts said.

The bank was recently released from a seven-year-long asset cap, and market participants are focused on its growth plans.

Goldman Sachs

Analysts said the Wall Street giant is likely to see a nearly 11 per cent increase in EPS, propelled by gains in investment banking and trading.

Morgan Stanley

Morgan Stanley’s EPS is estimated to increase over 7 per cent, with all eyes on management commentary on the burgeoning rebound for investment banking.

“After a relatively seamless CEO transition and a recalibration of strategic targets last January, CEO Ted Pick appears well-placed to flex franchise muscle and gain market share,” Ebrahim Poonawala, an analyst at Bofa wrote in a report.