Bank Earnings Kick Off This Week. 3 Things to Watch for.

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Bank earnings come out this week, and investors can expect to be pleased, but not necessarily wowed.

Now, gains have been impressive this year, but the sector—much like the recovery—is in a holding pattern. Back, though, to the positives. The

SPDR S&P Bank ETF
(KBE) is up an admirable 31%, outpacing the

S&P 500
‘s 16% gain. And third-quarter earnings are expected to be up roughly 20% year over year, according to analysts.

Still, enthusiasm on the Street is more muted than it has been the past few quarters because the obvious catalysts have largely played out or been priced in.

Start with reserves. Banks—many that were helped by extraordinary monetary and fiscal policy measures—have already released billions of the reserves set aside for soured loans back into earnings. Then, turn to share buybacks and dividends. Banks are repurchasing shares and paying the dividends they want after months of being reined in by the Federal Reserve to focus on customers and conserve capital during the pandemic. And finally, for the biggest names, there’s investment banking activity. Deal making, initial public offerings, and trading are up but face tough comparisons to last year.

All this leaves investors wondering what’s left to look forward to. There are more catalysts, but the timing of when they’ll be realized is really a guessing game. The reasons why: Banks need the yield curve to steepen and businesses and consumers to start borrowing again at prepandemic levels. And both are largely out of the banks’ control—especially as the Covid-19 Delta variant drags on the economy.  

“The next leg of the recovery for banks and bank stocks—when, not if—relies on sufficient macro momentum to support higher interest rates across the yield curve and the return of healthy loan demand,” writes Susan Roth Katzke, an analyst at Credit Suisse.

JPMorgan Chase (ticker: JPM) will be the first of the big banks out of the gate, posting on Wednesday. Investors will have more to chew on the next day from

Bank of America

(BAC),

Citigroup

(C), Morgan Stanley (MS) and Wells Fargo (WFC).

Goldman Sachs

(GS) wraps things up on Friday.

Analysts are sticking with what they usually say about earnings: The quarterly results don’t matter as much as the C-suite outlook. And while that song gets old, banks generally do get a pass because they’re uniquely positioned to see what’s coming in the economy.

Here’s what Wall Street will be focusing on:

Economic outlook: With the third quarter typically being the weakest in the bank sector, the Street will be paying more attention to what the CEOs think is ahead for the economy and business. Investment banking fees should stay high but perhaps lower than in previous quarters since mergers and acquisitions, and IPOs have slowed. Also, investors will be listening closely to comments about the pace of recovery.

Net interest income: Few metrics are watched more closely at a bank than its net interest income—the difference between the interest earned on assets and paid out on loans. And with interest rates still low, it has been a challenging time for banks. But analysts at

Deutsche Bank

are hopeful that the banks are nearing an inflection point: Net interest income is flattish on a sequential basis right now and down 2% year over-year, but will be poised to increase soon. Goldman Sachs analysts project that if rates rise by 100 basis points, net interest income could increase by 13% in the first year after the hike and 18% in the second year. The analyst team notes, however, that roughly 30% of the upside case is already priced into the market. Among the top seven largest banks, Goldman Sachs sees the most upside for Bank of America and

PNC Financial Services

(PNC).

Loan growth: Closely related to net interest income is loan growth and for the banks, the outlook has been pretty dire over the past 18 months. Aside from a booming mortgage market, businesses and households alike have been reluctant to borrow—both because of feelings of uncertainty and feeling flush with cash from the federal stimulus packages. That sentiment will eventually change. The the question is, of course, when. Data from the Fed shows loans were up less than 1%, compared with the period ending June 30. As with net interest income, analysts expect that banks at an inflection point on loan growth, with Goldman Sachs analysts projecting 4% year-over-year growth in 2022. 

Actually, investors have a few things to look forward to.

Write to Carleton English at [email protected]