As another bank earnings season approaches, it seems that banks are still facing challenges that they can’t seem to overcome.
In the past two quarters, the sector managed to surprise investors with positive results. However, Wall Street remains cautious and uneasy about the future of lenders in the midst of uncertain market conditions.
This quarter, the main concern revolves around rising bond yields. Banks have been hoping for higher interest rates to improve their lending margins. Unfortunately, the Federal Reserve’s aggressive rate hikes over the last 18 months have caused more harm than good.
Just as banks were starting to benefit from higher rates, their funding costs skyrocketed. Furthermore, they had to deal with the potential of increased defaults among borrowers, not to mention the significant unrealized losses in their bond portfolios.
The likelihood of interest rates staying high for a prolonged period and the negative implications associated with it have led analysts at Keefe, Bruyette & Woods to revise down their 2024 earnings estimates by 3%. As a result, the KBW Nasdaq Bank Index (ticker: BKX) has remained down by over 20% this year.
Given this outlook, the analysts are approaching this earnings season with caution.
“While any ‘limited surprises’ might be enough to trigger a temporary bounce, it will take more confidence in the economy, a clearer path for interest rates, and a better understanding of how the cyclical banking sector will perform in a high-rate environment for sustained interest and positive re-rating to occur,” commented Christopher McGratty, an analyst at KBW, in a note on Thursday.
Challenging Times for the Banking Sector
The banking sector has faced an array of challenges in the past nine months. It all started in the first quarter with the collapse of Silicon Valley Bank and Signature Bank, which caused a great deal of investor apprehension. As if that wasn’t enough, the second quarter brought more worries about the effects of these failures, along with new regulations aimed at preventing similar incidents.
While these issues are still causing concern, bond yields have now taken center stage. However, some experts on Wall Street believe that the fear surrounding this issue is exaggerated.
According to Erika Najarian, an analyst at UBS, the current situation might actually be favorable for banks within the SPDR S&P Regional Banking ETF (KRE). These banks rely more heavily on interest income compared to their larger peers who also generate a significant portion of their revenue from fees.
Coming up this Friday, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) will be posting their results. In the following weeks, we can expect to see the results from Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), and several regional banks.
Despite the challenges, there is hope on Wall Street that the results will surpass expectations.