By Carleton English
Bank earnings are coming, and once again, it’s about the outlook, not the earnings. Investors are hoping bank executives paint a rosy picture of the economy.
JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo are all set to report this coming Friday, and investors will be waiting with bated breath for signs that 2024 will be better than 2023. Remember 2023? It was the year that saw rising Treasury yields hammer the valuation of the bonds banks owned, forcing First Republic Bancorp, Silicon Valley Bank, and Signature Bank into receivership.
Still, the year looks to have ended on a high note. Falling Treasury yields helped to boost the value of bonds sitting on banks’ balance sheets and narrow their unrealized losses. This was especially true for Bank of America, which faced a hit of as much as $130 billion. With the threat diminishing, bank stocks rallied in the last three months of the year, with the KBW Nasdaq Bank Index gaining 22.6%.
Unfortunately, the stocks may have gotten ahead of themselves. Earnings are likely to be solid, as banks have benefited from higher net interest income and generally favorable credit trends, but the stocks are stuck in a tough spot. They’ll have to deal with the impact of the Federal Deposit Insurance Corp.’s assessment on large and midsize banks to replenish the deposit insurance fund following the collapse of the three above-mentioned banks last spring. The one-time charge could hit fourth-quarter earnings per share by as much as 35% at large banks and 12% at midsize banks, according to Christopher Marinac, an analyst at Janney Montgomery Scott.
Uncertainty around the direction of Treasury yields could also weigh on the stocks. If they head higher after the fourth quarter’s wild rally, portfolio fears could return. Or the Federal Reserve could start cutting rates — it’s still likely to happen in March, according to the CME’s FedWatch tool — which could cause net interest income to drop. Analysts at Goldman Sachs Group see a 3% decrease for the year in net interest income, coming off a 16% anticipated increase for 2023.
Credit quality could also be an issue. Consumers have remained resilient over the past four years, with signs of borrower weakness only just starting to show up at banks as delinquencies and charge-offs hover around prepandemic levels. It’s enough to keep some investors on the sidelines as they fret over how much worse things could get if the economy weakens, if it weakens at all. Analysts at Keefe, Bruyette & Woods are effectively neutral on banks, warning that deteriorating credit could cause earnings per share to drop by as much as 25% across their coverage universe.
Against that uncertain backdrop, selectivity is essential, and KBW highlights KeyCorp, Webster Financial, and Goldman Sachs as potential opportunities. KeyCorp ended the year with a strong run-up, but analysts see shares advancing a further 18%. It was one of the first banks to post weak net interest margins in 2023, KBW analysts expect that it will be among the first to benefit as interest rates — hopefully — stabilize in 2024. Meanwhile, investors get a 5.8% yield.
Webster often flies under the radar, with assets of $73 billion at the close of the third quarter. That could be a good thing, as the bank is largely immune from an onslaught of regulations expected to hit banks with assets north of $100 billion. Its return on tangible common equity is 21% and it trades at 1.7 tangible book value, roughly in line with its five-year average. KBW analysts see shares advancing 23%.
Finally, after being a punching bag for much of 2023, this year could be a strong one for Goldman. Having shed much of its money-losing consumer businesses, the slimmed-down Goldman can focus on what it does best: investment banking. With rates normalizing, deal activity and IPOs should come back, which will get shares humming again, with as much as 8% upside.
This year may be a bumpy one for banks, but there’s still plenty of opportunity.
Write to Carleton English at carleton.english@dowjones.com