US bank Q1 results preview: margins, bad loans and 8% interest rates

Weaker first-quarter earnings by leading US banks will be in contrast to the performance of their shares after markets factored in fewer interest rate cuts in the year ahead.

The industry outlook for net interest income – which benefits from higher interest rates - looks a lot stronger than during January’s results season, when some on Wall Street were betting on lower rates as soon as March.

• Invest with ii: Most-traded US Stocks | Buying US Shares in UK ISA | Cashback Offers

Prior to today’s US inflation print, the date of that first loosening of Federal Reserve monetary policy was seen as June and only with a 60% probability. That was accompanied by expectations for two further cuts this year and three in 2025.

Uncertainty over the 2024 rates outlook was highlighted in stark terms this week by America’s best-known banker, JPMorgan Chase & Co (NYSE:JPM) boss Jamie Dimon.

He warned in his annual letter to shareholders that inflation could prove to be more persistent than expected and that his bank is prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes.

Dimon said: “These markets seem to be pricing in at a 70% to 80% chance of a soft landing — modest growth along with declining inflation and interest rates.

“I believe the odds are a lot lower than that. In the meantime, there seems to be an enormous focus, too much so, on monthly inflation data and modest changes to interest rate.”

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• A stock that could make your dreams come true
• The UK stocks just as good as America’s Magnificent Seven

Dimon pointed out that the US economy is being fuelled by large amounts of government deficit spending and past stimulus.

He added: Quantitative tightening is draining more than $900 billion in liquidity from the system annually — and we have never truly experienced the full effect of quantitative tightening on this scale.”

His bank’s first-quarter results are due on Friday, the same day as Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC). The Goldman Sachs Group Inc (NYSE:GS) is on Monday, followed by Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) the next day.

Last year’s industry figures were given a significant boost as net interest income, the difference between what a bank earns in interest on loans and what it pays out in interest on deposits, benefited from the unprecedented run of Federal Reserve interest rate hikes.

This year’s first-quarter performance is likely to be mixed, with FactSet last week forecasting an overall 18% year-on-year decline in bank earnings. This is despite a recovery in investment banking revenues as M&A activity begins to recover from the low levels of a year earlier.

Analysts also expect a jump in the losses on loans marked as unrecoverable, with the Financial Times reporting that the collective figure of JP Morgan, Citigroup, Wells Fargo and Bank of America could jump to $6.7 billion (£5.3 billion) in the quarter from $3.85 billion a year earlier.

However, the newspaper said the outlook of fewer interest rate rises in 2024 meant that banks could be inclined to improve January’s guidance for net interest income.

• A solid, low-risk investment to hold for the long term
• US shares to put in your ISA in 2024

And with the course of rate hikes seemingly having run its course, pressure on deposit costs should continue to decelerate. FactSet said this meant several banks are likely to post improved net interest margins for the first quarter, or strengthen guidance for the rest of 2024.

The optimism has been reflected in share price performances since the start of March, with JP Morgan Chase, Citi and Wells Fargo now more than 15% higher in the year to date.

Their improvements have come against the backdrop of a series of record highs for the S&P 500, which now is valued on a forward 12-month earnings multiple of 20.5 times compared with the five-year average of 19.1 times.

However, jitters ahead of the results season mean the S&P 500 has just gone seven sessions in a row without a new record, the longest period without an all-time high since January.

Other confirmed dates in Wall Street’s results calendar include Apple Inc (NASDAQ:AAPL) on 2 May, Coca-Cola Co (NYSE:KO) on 30 April and Netflix Inc (NASDAQ:NFLX)on 18 April. FactSet estimates an earnings growth rate for the S&P 500 of 3.2%, marking the third-straight quarter of year-on-year improvement for the index.