(Reuters) – America’s largest lenders are expected to report moderately higher third-quarter profits next week as pandemic-related accounting adjustments that doubled profits earlier this year fade and business begins to return to the normal.
Analysts on average expect JPMorgan Chase & Co, the country’s largest lender, to post slightly lower profits than the period last year, when the earnings season kicks off on Wednesday, according to the Refinitiv I / B / I / O data.
Next Thursday, Citigroup Inc and Morgan Stanley are both expected to report a 15% increase in profits, while Bank of America Corp is expected to rise by around 35%. Wells Fargo & Co, which also reports Thursday, is expected to post a massive jump of more than 100% in a quarter in which results were depressed by unusual spending.
Goldman Group Inc will close the week on Friday, with earnings expected to rise slightly.
Share buybacks will boost earnings per share in the quarter and into future periods.
Investment banking clusters are expected to make dramatic gains from a record takeover boom, while lower rate trading income will be partially offset by strong equity volumes.
But analysts say the focus will be on whether net interest income, which provides more than half of banking sector income but has stagnated in recent quarters, is expected to increase in the coming months. due to rising interest rates and new demand for loans from businesses and consumers.
“That’s going to be the question. It’s the heart of the business for everyone, ”said Gerard Cassidy, Gerard Cassidy analyst at RBC Capital Markets.
Some banks might show that they are earning more interest because they have started investing more of their excess cash in securities, such as 5-year US Treasuries which were recently earning 1%, three times the amount. at the beginning of the year.
Analysts will also be looking for signs that commercial and industrial borrowing has stopped falling. They expect an increase once the supply chains hampered by COVID recover and allow businesses to build up stocks that need bank financing. Many businesses and consumers have paid off their loans during the pandemic.
Bank of America’s expected 35% profit increase is likely due to lower loan loss provisions and higher net interest income. Its results may suggest that its strategy of investing its excess liquidity in government and mortgage-backed securities has paid off.
Unlike at the start of this year, banks will benefit only marginally this quarter from the release of reserves for pandemic-related loan losses that have not materialized. Banks have already released 60% of the $ 50 billion in reserves they set aside and will likely only release another $ 5 billion this quarter, according to Goldman Sachs analyst Richard Ramsden.
He expects Wells Fargo and Citigroup to experience the greatest benefit.
The results of these two banks could also be influenced by the amount they have to spend to comply with orders from regulators to improve their controls.
Wells Fargo’s profits the previous year were hit by the costs of repairing damage to customers.
M&A FEES, NEGOTIATION
Big investment bank takeover advisory fees will increase by 80% on average, Cassidy said, adding that he also expects share underwriting to increase.
Trading income, on the other hand, is expected to decline by around 10% on average as fixed income markets, which generated record trading volumes last year, stabilized at more normal levels.
JPMorgan’s third-quarter net profit is expected to decline about 3% from a year ago due to lower trading revenues and higher expenses, according to analysts’ average estimate.
The results of investment banking giant and fund manager Morgan Stanley are expected to rise on higher takeover advisory fees, higher equity trading income and higher wealth management fees.
Goldman Sachs is also expected to benefit from higher merger and acquisition costs amid the biggest global boom on record.
Most banks will report that expenses have increased more than revenues, according to Ramsden. Keeping up with the competition continues to demand more spending on technology. Analysts also fear that banks will have to pay more to attract employees.
Reporting by David Henry and Elizabeth Dilts Marshall in New York; edited by Michelle Price and Nick Zieminski