US banks’ Q4 median earnings per share, or EPS, are expected to decrease but the sector may still be attractive to investors as current valuation levels offset headwinds, RBC Capital Markets said Tuesday in a note to clients.
Q4 median EPS will likely decrease about 18% from a year earlier and will be down 9.5% from the previous quarter, the note said.
“On a year-over-year basis, we expect median EPS to decrease driven by declines in net interest income, higher provisions
and higher noninterest expense, partially offset by growth in noninterest income,” said RBC analysts including Gerard Cassidy.
Sequentially, the banks’ EPS will likely be hit by lower net interest income and higher provisions, the analysts said.
“Though we expect to see headwinds in 4Q23, we believe today’s valuation levels discount these trends and make the group attractive both on an absolute and relative basis,” RBC analysts said. “Investors who believe that the terminal rate has or is about to be reached and believe the economy will experience a ‘soft landing’ in 2024 should look to own banks stocks.”
With the collapse of First Republic Bank, Silicon Valley Bank and Signature Bank increasingly in the rear-view mirror, investors will now be eyeing business trends driven by “modest loan growth, normalizing credit costs, deposit betas, NIB (noninterest bearing deposits) account balances, rates paid on deposits, NIMs (Net Interest Margins), capital markets activity and cost savings programs,” the note said.
Also, commercial real estate credit trends, especially in the office space, will be under the spotlight, the analysts said.
Meanwhile, loan loss provisions are expected to be “benign relative to 3Q23 due to the resiliency in the US economy,” the note said.
On loan growth, RBC expects a “modest median sequential increase of 0.8% in total loans and a [year on year] increase of 1.0%” while it sees the median net interest margin declining 24 basis points year on year and decreasing 4 basis points quarter on quarter.