Deep Dive: These 7 tables show just how bad this ‘crisis quarter’ could be for earnings of the 20 largest banks

Following earnings season, the big banks will undergo their annual regulatory stress tests conducted by the Federal Reserve. Part of the regulatory process during the second quarter will be the submission of annual capital plans for the Fed’s approval. These include plans for dividend increases and share repurchase programs. You should expect both to be curtailed this year.

As expected by investors who had sent the troubled First Republic Bank’s
FRC
preferred shares tumbling, the bank suspended dividends on all of its preferred series on April 7. This followed the elimination of its dividend on common shares in March. These are steps any bank would take to shore up capital if it were forced to book losses on securities sales while raising cash amid a significant outflow of deposits.

The decline in bonds’ market values during the period of rapid increases in interest rates that the Federal Reserve started in March 2022 has pushed bank’s regulatory capital ratios lower. Buying back shares also weighs on capital ratios.

In a note to clients on March 16, Odeon Capital Group analyst Dick Bove indicated that the crisis that led to the downfall of Silicon Valley Bank and Signature Bank of New York was “over,” in part because of an effort among the largest banks to prop up First Republic with $30 billion in deposits.

But Bove also believes stock buybacks among the banks “will be meaningfully cut back if not flat out eliminated.” In the current environment, this isn’t much of a stretch.

Bove listed three problems that can be caused by banks’ share repurchases:

• They remove working capital that can be used to provide returns to a bank.

• They “flat-out” give capital “to investors who want nothing to do with the bank — they are selling its stock.”

• They don’t necessarily help banks’ share prices; “many bank stocks are selling below their prices of five years ago. “

So far this year, the KBW Nasdaq Bank Index
BKX
is down 20% with dividends reinvested. If you are looking for a catalyst for bank stocks near-term, it isn’t likely to spring from the stress test results, dividend increases of share buybacks. But there could be opportunities following an overreaction by investors pushing shares lower — more about that below.

What follows is a series of tables showing first-quarter estimates for the largest 20 U.S. banks or bank holding companies, based on their total assets as of Dec. 31. The list excludes SVB Financial Group
SIVBQ,
the holding company of Silicon Valley Bank, which was shut down on March 10, following an accelerating outflow of deposits. (The other failed institution, Signature Bank of New York
SBNY,
was the 28th largest U.S. bank or bank holding company as of Dec 31.)

The same list, in the same order, is used in every table.

For large U.S. banks, first-quarter earnings season will kick off on Friday, when JPMorgan Chase & Co.
JPM,
Citigroup Inc.
C
and Wells Fargo & Co.
WFC
announce their results before the market open.

Investors might be well-served by paying more attention than usual to comments from bank executives in the earnings press releases and during earnings conference calls.

“We expect a challenging earnings season for the banks as managements shift
to the defensive as liquidity measures are implemented,” wrote Wedbush analyst David Chiaverini in his industry earnings preview March 29.

Earnings per share

Let’s begin with tables showing consensus estimates for earnings per share (EPS) among analysts polled by FactSet, as of 6:30 ET on Monday, among analysts polled by FactSet. There were significant revisions to the estimates last week as first-quarter industry and economic events were baked-in, and there will be more revisions as the week goes on.

The first table compares current EPS estimates for all of 2023 with those as of Dec. 31. These have declined for all but three of the largest 20 U.S. banks.

Click the tickers in the first table for more about each bank, including full news coverage and stock data, including price ratios and dividend yields.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

For banks, it is often useful to show five quarters of data for comparisons. This can help illustrate current trends while still allowing year-over-year comparisons.

Here are consensus estimates for first-quarter EPS, with actual results for the previous four quarters:

Interest margins

A bank’s net interest margin is the difference between its average yield on loans and deposits and its average cost for funding, made up of deposits and wholesale borrowing. This is an important measure of profitability, and for the fourth quarter, the U.S. banking industry’s margin improved to 3.37% from 3.14% the previous quarter and 2.55% a year earlier.

Net interest margins aren’t calculated in a uniform manner in banks’ earnings filings with the Securities and Exchange Commission. So what follows is the largest banks’ estimated net interest income (NII, interest income less interest expense) divided by estimated average earning assets (AEA, including loans and securities investments) for the first quarter and actual numbers for the previous four quarters, as calculated by FactSet:

This performance measure emphasizes the importance of sequential comparisons of quarterly data. The bolded estimated margins for the first quarter are those expected to counter the industry trend for margin expansion.

The “big four” group of U.S. banks at the top of the table are all expected to show widening first-quarter margins from the previous quarter and from a year ago. But competition is increasing and investors can expect this theme to play out and hurt some banks’ margins over coming quarters.

“It had already been a fiercely competitive environment for deposit
gathering, and the recent bank failures may turn the deposit knife fight into a
metaphorical gunfight,” Chiaverini of Wedbush wrote in his industry earnings preview.

For more on competition for deposits, here’s a look at why banks’ interest rate increases haven’t kept pace with the rising federal-funds rate and how the outflow of deposits to money market mutual funds could hurt the U.S. economy.

More: Banks on the line for deposit flows and margin pressure in Q1 updates as they reel from banking crisis

Net interest income

Here are the estimates and actual numbers for NII, with some large expected year-over-year increases that may offset declines in noninterest income (shown lower) for the largest three banks:

How credit quality affects earnings

As the Federal Reserve keeps raising interest rates in an attempt to cool the U.S. economy and lower inflation, banks are becoming more concerned about potential loan losses. This is exacerbated by maturing loans secured by commercial real estate — many of these loans have 10-year terms, which means a good number mature every year and renewing the loans will be difficult if collateral values have plunged.

Read: Commercial real-estate prices could tumble 40%, rivaling declines from the 2008 financial crisis, according to analysts at Morgan Stanley

Every quarter, a bank will make provisions to loan loss reserves (LLR), which are additions to reserves to cover expected losses on problem loans. A provision directly lowers pretax income, while a negative provision raises earnings. During an economic rebound, it isn’t unusual to see earnings boosted from negative provisions for several quarters. Some banks were still doing so a year ago, as they released reserves that had been built up quickly during the early stages of the COVID-19 pandemic in 2020.

Here are estimated provisions for the first quarter, in millions, with actual numbers for the previous four quarters:

For several of the banks, first-quarter provisions are expected to decline from elevated numbers in the fourth quarter.

Noninterest income

These figures can be especially important for the largest players, because they include investment banking and trading income, as well as well as asset-management and custody fee income. Here are available estimates and actuals for the largest 20 U.S. banks’ noninterest income, in millions:

Stock ratings and price targets

Here are first-quarter total returns for the largest 20 U.S. banks, with a ratings summary and price targets for the stocks:

Aside from First Republic, the listed stock that has performed the worst so far this year is Charles Schwab Corp., down 41% with dividends reinvested. This is when some investors will wonder when to start fishing for bargains.

On April 5, Keefe, Bruyette & Woods analyst Kyle K. Voigt reiterated his “outperform” rating for Schwab, while lowering his price target for the shares to $65 from $89. The new target would be a 32% from Schwab’s closing price of $49.35 on April 6. He also lowered his 2023 EPS estimate for the company to $3.30 from $4.43 and his 2024 EPS estimate to $3.90 from $5.24.

Despite the target and estimate cuts, Voigt wrote in a note to clients that “the stock is likely pricing too much downside risk, with the risk/reward having shifted much more favorably.

With so many moving parts, including concerns about banks’ liquidity and capital, in light of the two failures, and earnings pressure from concerns over the decline in commercial property values and a possible economic slowdown, this bank earnings season promises to be a volatile one.

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