Proactive Investors - US bank earnings, with more than $1 trillion in market capital reported on the first day of the fourth quarter earnings season alone, support the view of Bank of America (NYSE:BAC) analysts for a continued re-rating higher of bank stocks.
In a note to clients following the release of the latest financial reports from JPMorgan Chase & Co (NYSE:NYSE:JPM), Citigroup Inc (NYSE:NYSE:C), Wells Fargo & Company (NYSE:NYSE:WFC) and Bank of New York Mellon Corp (NYSE:NYSE:BK, ETR:BN9) on Friday, the analysts noted that their view was supported by improving earnings per share (EPS) visibility and the US economy avoiding a hard landing.
Key themes from the reports are that rate cuts are expected to pressure net interest income in the near term.
Credit quality is holding up with commercial real estate (CRE) driving higher losses amid normalizing consumer financials, the BoA analysts wrote.
They also highlighted that capital levels are strong which bodes well for capital return potential in the second half of 2024 and 2025.
The analysts pointed out that, of the banks that reported Friday, Wells Fargo was the notable underperformer driven by downside EPS risk from rate cuts.
“This raises the question that could asset sensitive banks underperform coming out of 4Q prints? Possibly, as the Street digests implications for fiscal 2024 and 2025 EPS,” they wrote.
Investor tolerance for CRE losses and C&I one-offs will also be tested, they added.
“Trajectory of quarterly net interest income likely to matter, the second half of 2024 rebound (to the extent that investors buy-into management’s guidance) versus continued decline through to the fourth quarter of 2024,” they wrote.
Unlike Wells Fargo, Citigroup and BNY Mellon both outperformed with in-line to better-than-expected fiscal 2024 guidance.
“On Citigroup, we believe that management said all the right things as the Street evaluates the probability of Citigroup achieving a 10%-plus return on tangible common equity by 2026,” they wrote.
“Friday's update reaffirms our view that Citigroup offers the most compelling risk/reward in the large-cap banks.”