The largest US banks are poised to see higher profits from their lending businesses this year, as the Federal Reserve is expected to make only modest cuts to benchmark interest rates. Despite warnings of reduced profits due to rate cuts and savers moving funds to higher-paying deposit accounts, the outlook for big banks has improved with the expectation of fewer rate cuts. Analysts anticipate that banks may lift their guidance when reporting their first-quarter results, with the market now expecting the Fed to make between two and three rate cuts in 2024. Despite a projected decrease in net income for the first quarter, analysts foresee a rise in investment banking revenues as mergers and acquisitions activity shows signs of recovery.
Key Takeaways
- Big US banks are expected to earn higher profits from lending as the Federal Reserve likely makes only modest cuts to benchmark interest rates in 2024.
- Banks such as JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo charged more for loans over the past two years, aligning with the Fed's interest rate increases.
- Despite the brighter outlook for net interest income, analysts anticipate a 14% decrease in net income across the six major banks for the first quarter of 2024.
- Analysts expect investment banking revenues to rise in the first quarter from low levels a year ago, with signs of recovery in mergers and acquisitions and capital markets underwriting.
- Trading revenues for the first quarter of 2024 are expected to be about $30bn collectively, down roughly 6%, and the lowest start to the year since 2020.
News Content
US banks anticipate higher profits from their lending businesses in 2024 due to the likelihood of fewer rate cuts by the Federal Reserve. The banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, are expected to see improved net interest income as the market now anticipates only two to three rate cuts throughout the year, down from the previously expected six cuts. Despite a forecasted drop in first-quarter net income, analysts expect a rise in trading revenues and a potential recovery in investment banking revenues in 2024. This positive outlook is in contrast to the banks' previous warnings of declining profits due to rate cuts and increased deposit account rates.
The banks have steadily increased cash reserves to cover potential losses with the anticipation of higher charge-offs in the first quarter of 2024, and they are expected to continue bolstering reserves throughout the year. Although trading profits are projected to be lower compared to previous years, signs of recovery in investment banking revenues, particularly in mergers and acquisitions and capital markets underwriting, indicate a potential pickup in revenues later in the year. Overall, despite some challenges, the outlook for US banks in 2024 appears to be more positive than initially anticipated.
In addition, some banks are expected to release their first-quarter results beginning in April, providing further insights into their performance and potential adjustments to their guidance. Overall, the expectations for US banks in 2024 indicate a shift towards improved profitability and potential recovery in investment banking revenues, despite challenges such as increased lending costs and higher charge-offs.
Analysis
The anticipated increase in profits for US banks in 2024 can be attributed to the expected reduction in rate cuts by the Federal Reserve. This shift is likely to lead to improved net interest income and a potential recovery in investment banking revenues. The banks' proactive measures, such as increasing cash reserves to cover potential losses and adjusting their guidance, indicate a strategic response to the changing market conditions. In the short term, a forecasted drop in first-quarter net income may be offset by a rise in trading revenues, while in the long term, signs of recovery in investment banking revenues suggest a more positive outlook. Overall, US banks are poised for improved profitability and potential recovery in 2024.
Do You Know?
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Net Interest Income: This refers to the income that banks earn from the difference between the interest they receive from their lending activities and the interest they pay on deposits and other liabilities.
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Charge-offs: These are debts that a creditor has given up on collecting. When a bank expects higher charge-offs, it means they anticipate more borrowers will default on their loans, leading to potential losses for the bank.
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Investment Banking Revenues: This encompasses the fees earned from providing financial services such as underwriting, mergers and acquisitions, and advising on various financial transactions.