US bank earnings season kicks off with JPMorgan, Citi and Goldman

​​​Major banks kick off fourth quarter reporting

JPMorgan, Citigroup, Bank of America and Goldman Sachs lead off United States (US) fourth quarter (Q4) earnings season this week. Consensus expectations point to the sector remaining profitable despite a softer macroeconomic backdrop and persistent headwinds.

​Analysts expect US bank earnings to rise by high single digits year-on-year (YoY). This growth comes despite challenging conditions, with trading income and fees doing the heavy lifting rather than traditional balance sheet expansion.

​The banks face a tricky environment. Falling policy rates late last year and a flatter yield curve have squeezed net interest income, particularly at consumer-focused lenders. Investment banks with strong trading desks look better positioned.

​For traders watching these results on our trading platform, the question isn't whether banks beat estimates. It's what management says about the outlook amid mounting political and regulatory uncertainty.

​Trading revenues offset net interest income pressure

​Net interest income remains under pressure across the sector. The Federal Reserve's (Fed) rate cuts late last year and a flatter yield curve have weighed on lending margins, hitting consumer-heavy banks particularly hard.

​However, volatility in rates, foreign exchange and commodities late in the quarter likely provided a lifeline. Fixed income trading desks should report solid results, with investment banks emerging as relative winners in this environment.

​The shift matters for investors. It suggests the traditional deposit-gathering model faces structural challenges, while capital markets businesses remain resilient. This could influence which banks outperform in coming quarters.

​Credit quality and consumer stress under scrutiny

​Investors will scrutinise credit card delinquencies, charge-offs and loan loss provisions closely. These metrics offer insight into consumer health as excess savings from pandemic support measures finally fade.

​Fed consumer credit data has shown some deterioration. The question is whether this represents a return to pre-pandemic norms or signals genuine stress building in household balance sheets.

​Management commentary on credit trends will be crucial. Banks that sound overly optimistic may face scepticism, while those acknowledging pressure but showing it remains manageable could reassure investors.

​Loan loss provisions deserve particular attention. If banks are adding to reserves despite relatively benign current charge-offs, it suggests they see trouble ahead. That forward-looking signal matters more than backward-looking numbers.

​Loan growth remains subdued amid cautious outlook

​Commercial and industrial loan demand remains weak. Businesses aren't borrowing aggressively, reflecting uncertainty about the economic outlook and hesitation to invest ahead of potential policy shifts.

​Management commentary is expected to echo cautious signals from the Fed's Senior Loan Officer Survey. This quarterly report has consistently shown tightening lending standards and weak demand across categories.

​The weakness in loan growth matters because it limits one of banks' core revenue drivers. Without balance sheet expansion, earnings growth must come from fee income, trading or cost-cutting.

​For those trading bank shares, subdued loan growth raises questions about sustainable earnings momentum. It's one thing to beat quarterly estimates through trading gains; it's another to demonstrate a clear path to consistent growth.

​Capital return and regulatory uncertainty

​Strong capital ratios leave room for dividends and share buybacks. Banks have rebuilt capital buffers substantially since the financial crisis, giving them flexibility to return cash to shareholders.

​However, banks may remain conservative given the current environment. Political uncertainty following recent threats to Fed independence and potential regulatory changes could prompt caution about aggressive capital deployment.

​Stress test results disclosed previously showed banks comfortably exceeding minimum requirements. This suggests capacity for meaningful buybacks, but management teams may prefer to maintain extra cushion given unclear policy direction.

​Forward guidance shaped by macro uncertainty

​Forward guidance will matter more than Q4 results. Management teams must navigate US inflation data, Fed policy uncertainty and heightened political risk when discussing their outlook.

​Recent revelations about political pressure on the Fed chairman add complexity. Banks must factor in the possibility of faster rate cuts driven by political considerations rather than economic fundamentals.

​Inflation data remains sticky, complicating the picture further. If price pressures persist while the Fed faces pressure to ease, banks could find themselves in an uncomfortable stagflation-lite scenario.