Major U.S. banks are preparing for a challenging earnings season in the third quarter, with lower profits expected due to rising deposit costs. The Federal Reserve's recent interest rate cuts may provide some relief for the banking sector in the future.
The Federal Reserve's benchmark rate is projected to decrease from 4.75-5% to 3.4% by the end of 2025 and further to 2.9% in 2026. This shift could help banks regain profitability as they deal with higher deposit costs and stagnant loan growth.
In 2022, the Fed's rate hikes allowed banks to increase loan rates, boosting net interest income (NII). However, the current landscape has changed, with deposit costs rising and loan growth stalling. Most large banks are expected to report declines in NII, both year-over-year and sequentially. Bank of America and Goldman Sachs are exceptions, with Bank of America projected to see a 1% increase in NII from the second quarter and Goldman Sachs expected to report a year-over-year increase in NII.
Wells Fargo is facing a tough situation, with a projected sixth consecutive quarterly decline in NII primarily due to rising deposit costs. JPMorgan Chase, the largest bank in the U.S., has seen a decline in deposits for two consecutive quarters while incurring significantly higher interest costs on those deposits. Loan growth estimates for large banks have remained stagnant in the third quarter, with little to no change compared to the previous quarter and the same period last year. Citigroup is expected to lead with a 4% increase in loan growth from last year's third quarter.
The recent rise in stock and bond markets has positively impacted wealth management fees for many banks. However, as the Fed implements rate cuts, investor focus may shift towards the broader economic landscape, potentially leading to declines in wealth management fees. Most banks are preparing for lower expected revenues in investment banking, reflecting a lack of interest in mergers and acquisitions. However, the anticipated Fed rate cuts could stimulate M&A activity in the future, potentially boosting investment banking revenues.
The interplay between interest rates, consumer behavior, and economic conditions will be critical in shaping the financial performance of banks in the coming months.