U.S. Banks’ Record-Breaking Earnings Streak Has Probably Peaked




U.S. Banks’ Record-Breaking Earnings Streak Has Probably Peaked


(Bloomberg) -- As banks close the books on another lucrative year, investors are looking for signs the era of record profits might have some more life.

Bank stocks are coming off their best year in more than two decades, outpacing the broader market with a 36% surge in 2019. And fourth-quarter profits at the six biggest U.S. lenders, set for release next week, will challenge the record $120 billion set in 2018, according to analysts’ estimates. Strong consumer units and corporate tax cuts are fueling the gains.

But there are warning signs: Estimates for 2020 are for a combined profit drop of $10 billion as global interest rates remain stubbornly low and geopolitical tensions stay high. Chief executives reviewing their results will help clarify whether those kinds of risks are enough to end the good times.

Next week offers “the first look” at 2020 prospects, Jason Goldberg, an analyst at Barclays (LON:BARC) Plc, said in an interview. “Anything that impacts economic growth tends to influence banks, so whether it’s at home or abroad, corporate and consumer confidence are important.”

Comments by bank chiefs in recent months have been mostly optimistic, but that was before a flare-up in tensions between Iran and the U.S.

Here’s what else to watch when JPMorgan Chase & Co (NYSE:JPM) kicks off earnings season on Tuesday:

Capital Markets

On the trading side, revenue will probably increase at least 20% from a year earlier, according to Susan Katzke, an analyst at Credit Suisse (SIX:CSGN) Group AG. Results will get a boost from comparisons to the last three months of 2018, when market turmoil took a toll on revenue, she said.

Some of the banks’ top executives said as much in December, with JPMorgan Chase & Co. Chief Financial Officer Jennifer Piepszak predicting trading revenue would be up “meaningfully,” especially in fixed income. Citigroup Inc. CFO Mark Mason said his bank’s trading revenue was set to rise by a percentage in the “high teens.”

Revenue from investment banking will benefit from a strong end to the fourth quarter, when deal announcements picked up and offered “a further affirmation of macro confidence,” according to Katzke. She expects investment-banking revenue to be “flattish on average.”

Piepszak said in December that she also expects fourth-quarter investment-banking revenue to be virtually unchanged from a year earlier, which was a more optimistic estimate than the decline JPMorgan predicted in October.

Interest Rates

Interest-rate whiplash characterized 2019. Banks expected to reap the benefits of higher rates when the year began, and then as the year progressed, the Federal Reserve embarked on a rate-cutting cycle, bringing net interest income -- one of the banks’ main revenue sources -- down as well. Net interest margin, the spread between lending rates and borrowing costs, is expected to have narrowed in the fourth quarter.

The biggest banks’ total net interest income fell in the third quarter for the first time since 2015, and is expected to have dropped again in the last three months of the year. But the decline was probably cushioned by loan growth, according to Gerard Cassidy, an analyst at RBC Capital Markets.

Consumer Health

Cheap borrowing costs and low unemployment have been bolstering the U.S. consumer for years, to the benefit of banks that lend to them. Retail banking businesses have driven much of the record profits in recent quarters as capital-markets results came in mixed. Bank executives remained optimistic about this part of the economy as recently as last month.

“The consumer is incredibly strong,” JPMorgan’s Piepszak said last month at an industry conference, citing good credit, a strong job market and healthy consumer sentiment.

Expenses

Even after years of cost reductions and job cuts at banks, pressure on revenue means the efforts will continue this year. There’s room for technology spending to moderate, for example, and branch strategies are being tweaked for further savings, according to Richard Ramsden, an analyst at Goldman Sachs Group Inc (NYSE:GS).

Investors are also watching headcount after global banks in 2019 announced the most job cuts in four years. Morgan Stanley (NYSE:MS) planned to do away with 1,500 jobs, or 2% of its workforce, in a year-end efficiency push, people familiar with the matter have said. Last summer, Citigroup Inc (NYSE:C) started eliminating 400 people from its trading division.

Wells Fargo

Charlie Scharf will directly address analysts and investors Tuesday for the first time since taking over as Wells Fargo & Company's (NYSE:WFC) chief executive officer in October. Investors are keen to hear what updates he’ll provide on his ongoing review of the company. The firm has taken a beating in recent weeks, with a series of downgrades pushing analysts’ outlook on the bank to its bleakest since the financial crisis.





Related News

U.S. stock futures retreat, Asia dips after Apple warns on virus impact
Today, 02:09
By Hideyuki Sano TOKYO (Reuters) - U.S. stock futures slipped from record levels on Tuesday after Apple Inc (O:AAPL) said it will not meet its revenue guidance for the March quarter as the coronavirus outbreak slowed production and weakened demand
China legal activist who called on Xi to 'give way' arrested: activists
Today, 02:06
By Huizhong Wu BEIJING (Reuters) - Chinese authorities have arrested a prominent rights activist and legal scholar who had called on President Xi Jinping to step down over his handling of crises including the coronavirus outbreak, two fellow
Australia's NSW state to ease water restrictions after heavy rains
Today, 02:03
By Colin Packham SYDNEY (Reuters) - Australia's New South Wales state said on Tuesday it will ease water restrictions after a deluge of rains filled dams across the country's east coast to their highest levels in more than two years. New
Coronavirus could be knockout blow for Hong Kong's once-thriving tourism, retail sectors
Today, 01:18
By Sarah Wu and Donny Kwok HONG KONG (Reuters) - Tom Bennell's olive oil distribution business took a heavy beating during months of pro-democracy protests that emptied Hong Kong hotels and restaurants, his major customers. Now he fears a
Japan finance minister watching coronavirus impact, to ensure fiscal policy steps
Today, 01:15
TOKYO (Reuters) - Japanese Finance Minister Taro Aso said on Tuesday he would ensure that fiscal policy steps would be taken as needed to respond to the spreading coronavirus outbreak while closely monitoring its impact on the economy. Aso told



Latest News
U.S. stock futures retreat, Asia dips after Apple warns on virus impact
18.02.2020 02:09
By Hideyuki Sano TOKYO (Reuters) - U.S. stock futures slipped from record levels on Tuesday after Apple Inc (O:AAPL) said it will not meet its revenue guidance for the March quarter as the coronavirus outbreak slowed production and weakened demand in China. The warning from the most valuable company in the United States sobered investor optimism
Read more
China legal activist who called on Xi to 'give way' arrested: activists
18.02.2020 02:06
By Huizhong Wu BEIJING (Reuters) - Chinese authorities have arrested a prominent rights activist and legal scholar who had called on President Xi Jinping to step down over his handling of crises including the coronavirus outbreak, two fellow activists said on Monday. Xu Zhiyong had been on the run since December after attending a gathering in the
Read more
Australia's NSW state to ease water restrictions after heavy rains
18.02.2020 02:03
By Colin Packham SYDNEY (Reuters) - Australia's New South Wales state said on Tuesday it will ease water restrictions after a deluge of rains filled dams across the country's east coast to their highest levels in more than two years. New South Wales (NSW), home to about a third of Australia's 25 million people and its biggest city
Read more
Coronavirus could be knockout blow for Hong Kong's once-thriving tourism, retail sectors
18.02.2020 01:18
By Sarah Wu and Donny Kwok HONG KONG (Reuters) - Tom Bennell's olive oil distribution business took a heavy beating during months of pro-democracy protests that emptied Hong Kong hotels and restaurants, his major customers. Now he fears a knockout blow as the city fights the coronavirus. The two-decade-old Olives and Oils supplies more than
Read more
Japan finance minister watching coronavirus impact, to ensure fiscal policy steps
18.02.2020 01:15
TOKYO (Reuters) - Japanese Finance Minister Taro Aso said on Tuesday he would ensure that fiscal policy steps would be taken as needed to respond to the spreading coronavirus outbreak while closely monitoring its impact on the economy. Aso told reporters after a cabinet meeting that economic fundamentals that supported domestic demand were holding
Read more