Key points:

  • Profits of the largest US banks are expected to decline due to a reduction in interest income and an increase in provisions for loan losses.
  • Loss rates on commercial and industrial (C&I) loans and commercial real estate loans are projected to rise.
  • The volume of M&A worldwide in the first half of the year increased by 20% compared to last year.

Financial experts expect second-quarter earnings at major U.S. banks to be lower than in the previous quarter due to lower interest income and higher provisions for loan losses.

As bank earnings season begins on Friday, analysts predict loss provisions for commercial and industrial (C&I) loans and commercial real estate loans will rise. This is because banks expect the quality of borrowers in these sectors to deteriorate.

Increased C&I credit risks

C&I loans (commercial and industrial) pose a greater risk to large banks than they did in 2023, according to the Fed’s latest stress tests conducted last month. The C&I loss rate is forecast to rise to 8.1%, up from 6.7% in last year’s test.

Despite these concerns, banks’ investment banking divisions could benefit from an acceleration in M&A activity. According to Dealogic, M&A volumes worldwide reached $1.6 trillion in the first half of the year, which is 20% more than a year earlier. Over the same period, equity capital market volumes grew by 10%.

Analysts will also be closely watching banks’ comments on their interest earnings as investors increasingly expect the Fed to cut interest rates in the coming months. Stabilizing interest rates has made it easier for banks to hold onto customer deposits, reducing competition for funds.

Overall, banks’ quarterly results may come under pressure due to higher provisions for C&I loan losses. However, increased activity on Wall Street may soften some of the blow.

Quarterly reports of the 6 largest US banks: forecasts

JPMorgan Chase. Earnings per share are expected to decline 13% year-on-year due to increased investment and resulting higher costs.

Bank of America. Earnings per share are forecast to fall by 9% due to lower net interest income (NII).

Wells Fargo. Earnings per share are expected to rise 3%, driven by fee income from investment banking and lower provisions for loan losses. However, low NPV rates are projected to continue.

Citigroup. Profit growth is expected due to rising commission income from investment banking operations.

Goldman Sachs. Profits are forecast to more than double compared to the second quarter of 2023, when they fell to a 3-year low. Goldman Sachs is likely to benefit from increased deal activity and reduced write-downs in the consumer sector.

Morgan Stanley. Earnings per share are expected to grow by 33% due to increased activity in mergers and acquisitions and capital markets.