6 Wall Street Banks' Earnings Signal What?

The US stock market's third-quarter earnings season started on a strong note, with major Wall Street banks reporting better-than-expected financial results.

On October 15th local time, Bank of America's reported financial statements showed that third-quarter revenue slightly increased to $25.49 billion, exceeding the market expectation of $25.3 billion. The net profit for the third quarter decreased by 12% year-over-year to $6.9 billion, with the main source of income, net interest income, down by 2.9% to nearly $14 billion, but still better than expected.

Additionally, Bank of America's third-quarter income from equity and fixed income, foreign exchange, and commodities trading increased by 12% to $4.93 billion. With trading activities picking up, investment banking revenue increased by 15%, which was better than analysts' expectations. Mergers and acquisitions advisory fees decreased by 14%, which was better than the previously expected 24% decline.

Citigroup's third-quarter revenue was $20.32 billion, a year-over-year increase of nearly 1%, higher than the analysts' expectation of $19.84 billion. Net profit fell by 9% to $3.2 billion, or $1.51 per share. Citigroup's market division revenue for the third quarter increased by 1% to $4.82 billion, a surprising increase as Citigroup had warned a few weeks earlier that revenue would decline, and ultimately, a 32% increase in equity trading revenue boosted the performance.

Although the surge in non-performing credit card loans put pressure on profits, Citigroup's other four main businesses (services, banking, wealth management, and US consumer banking) all achieved year-over-year revenue growth. The banking division's revenue jumped by 16% to $1.6 billion, with investment banking service fees increasing by 44%; service business revenue increased by 8% to $5 billion; US consumer banking revenue increased by 3% to $5 billion; wealth management business revenue soared by 9% to $2 billion.

Goldman Sachs Group also reported impressive financial results, with third-quarter revenue of $12.7 billion, a year-over-year increase of 7%, higher than the expected $11.8 billion; profit was $2.99 billion, a significant year-over-year increase of 45%, or $8.40 per share, also better than expected.

Due to strong debt and equity underwriting business, Goldman Sachs' investment banking revenue for the third quarter surged by 20% to $1.87 billion, exceeding the expected $1.62 billion, and its backlog of pending transactions increased compared to the same period last year and the second quarter of this year. The equity trading division's revenue was $3.5 billion, the best performance since the first quarter of 2021, which Goldman Sachs attributed to the growth in intermediary income from derivatives and cash products.

Overall, net interest income was better than expected, and investment banking and trading businesses performed well. Major Wall Street banks generally announced excellent third-quarter reports. Can the impressive performance continue?

Why did bank financial reports exceed expectations?In a rather "tacit" agreement, last week both JPMorgan Chase and Wells Fargo also reported good overall performance.

On October 11th, JPMorgan Chase announced its third-quarter results, with revenue of $43.32 billion, higher than the market estimate of $41.63 billion; net profit was $12.9 billion, better than the expected $11.6 billion; net interest income unexpectedly strengthened to $23.5 billion, also higher than the market expectation of $22.73 billion, mainly due to the growth in securities investment and credit card loan business.

Thanks to the Federal Reserve entering a rate-cutting cycle, the US stock market continues to advance, also enabling JPMorgan Chase's investment banking revenue to surge 29% year-on-year in the third quarter, reaching $2.4 billion, while management expected an increase of 15%.

Wells Fargo's net profit for the third quarter fell 11% to $5.1 billion, or $1.42 per share, but it was better than analysts' expectations of $1.28. Previously, Wells Fargo had a loss of $447 million on bonds held during portfolio adjustments; without these losses, earnings per share would be $1.52.

In addition, Wells Fargo's net interest income totaled $11.7 billion, a year-on-year decrease of 11%. Although interest income decreased, it is expected that the decline in the fourth quarter will be less than expected. Wells Fargo's investment banking department's middle fee income increased by 37% to $672 million, which boosted non-interest income to grow by 12% year-on-year to $8.7 billion.

Morgan Stanley's financial report released on October 16th also exceeded expectations, with third-quarter revenue of $15.38 billion, higher than the expected value of $14.35 billion, and its wealth management, trading, and investment banking business revenues were all higher than expected; pre-tax profit was $4.221 billion, a year-on-year increase of 34%.

Several factors have driven Morgan Stanley's impressive financial report. Market activity has provided momentum for its large wealth management business, investment banking business has rebounded, and trading activities have also performed strongly. As the Federal Reserve continues to lower interest rates, it will encourage more Wall Street companies to engage in financing and merger and acquisition activities in the future.

JPMorgan Chase's net interest income has unexpectedly strengthened, and its investment banking business has performed excellently; Goldman Sachs' third-quarter profits soared by 45%, and its stock trading business achieved the best performance in more than three years; Bank of America's net interest income exceeded expectations, and its investment banking and trading businesses boosted performance; Citigroup's five major businesses are generally strong, and its trading business achieved the best performance in ten years; Wells Fargo's net interest income has declined, but its investment banking department's middle fee income has soared; Morgan Stanley also performed well, with wealth management, trading, and banking businesses better than expected. Why do bank financial reports generally exceed expectations?

The financial reports of the US banking industry exceeding expectations are influenced by various factors. From the perspective of interest income, although the Federal Reserve started to cut interest rates in September, the overall interest rate level is still high, and the net interest margin of the banking industry has not experienced significant fluctuations in the short term, and interest income can still provide some support for profit growth; from the perspective of non-interest income, the comprehensive operation level of the US banking industry is high, and it has a good foundation in providing high added-value financial services. Despite the complex overall economic situation, as the Federal Reserve reverses its monetary policy, investment banking business has seen a certain degree of recovery, leading to a bottoming out and rebound of non-interest income in the US banking industry. From the perspective of operating costs, the US banking industry is competitive in cost control and operational efficiency improvement, continuously reducing operating costs by increasing technology investment and improving digitalization, and continuously improving operational efficiency.Soft Landing Signals Still Call for Caution

Overall, the consumer and corporate client businesses of major Wall Street banks have generally performed strongly, indicating that the U.S. economy may be able to achieve a soft landing.

Wells Fargo CEO Charlie Scharf stated, "We continue to look for changes in consumer health, and credit and debit card spending continues, albeit slowing down, but still healthy."

Under the expectation of a soft landing and a rate-cutting cycle, bank stocks may stand out in the future. Nanette Abuhoff Jacobson, a global investment and multi-asset strategist at Wellington Management, told reporters that she is more optimistic about the financial sector, followed by non-essential consumer goods, utilities, and information technology (IT) sectors, while having an underweight view on materials, essential consumer goods, and communication services.

Jacobson analyzed that after the Fed's rate cut in September, the market hit a new high. Based on traditional valuation indicators, U.S. stocks are overvalued. Out of caution, she holds a neutral view on U.S. stocks. However, considering the downward trend in interest rates and the potential for long-term earnings growth, U.S. indices seem closer to fair value. Productivity growth far exceeds the rise in unit labor costs, thereby enhancing corporate competitiveness. Corporate profit margins have expanded, providing support for the strengthening of their profitability.

In Du Yang's view, the financial reports of the U.S. banking industry convey signals of economic resilience and market activity, supporting the expectation of a soft landing. However, external risks and inflationary pressures still exist, and it is necessary to cautiously observe future economic development dynamics. On one hand, adjustments in the Fed's monetary policy have reduced the risk of a U.S.As the interest rate reduction cycle continues, the performance of U.S. banks will face a series of unfavorable and favorable factors in the coming period. Du Yang told reporters that, on the unfavorable side, the first is the gradual narrowing of the interest spread. Interest rate cuts will lead to a reduction in bank loan interest rates, thereby compressing the level of interest spreads and affecting the growth of net interest income. The second is the continuous increase in potential default risks. Against the backdrop of increased economic uncertainty, the debt repayment capacity of enterprises and consumers may be affected, leading to an increase in the ratio of non-performing loans. Although the proportion of non-performing loans in the four major U.S. banks remains relatively low, it has shown a trend of deterioration quarter by quarter, and the banking industry has generally increased credit provisions to cope with the risk impact brought by economic growth uncertainty.

On the favorable side, interest rate cuts can stimulate investment and consumption, promote economic activity growth, and thus have a positive impact on the expansion of bank credit scales. Interest rate cuts may also promote more refinancing activities, through which banks can earn fees and related income by providing integrated financial services. Interest rate cuts also encourage investors to seek higher-return investment opportunities, promoting the growth of wealth management and asset management businesses.