Can large banks in the United States rebound smoothly?

This year, the stock performance of large banks in the United States has surpassed other stocks in the S&P 500 index, and investor confidence is about to face a challenge. JPMorgan Chase, Wells Fargo, and Citigroup announced their second quarter results on July 12th, ushering in a new round of financial reporting season for the US banking industry. Bank of America will release its financial report on July 16th.

Firstly, the stock prices of these four largest banks in the United States have all risen by over 20% since January, outperforming the S&P 500 index. This increase is approximately twice the increase of the KBW Nasdaq Banking Index. As the Federal Reserve gradually lowers interest rates, regulatory agencies relax a series of new bank capital regulations, and Wall Street trading activity recovers, investors in large banks are optimistic about the strong growth potential of these financial institutions. Gerald Cassidy, a banking analyst at Royal Bank of Canada Capital Markets, said that the Federal Reserve expects to cut interest rates once or twice in 2024, followed by further cuts in 2025, which is a good sign for large banks.

Although JPMorgan's performance may leave other competitors behind, it is expected that the actual performance of major banks in the second quarter will not be shocking. JPMorgan Chase is expected to report a substantial net profit, partly due to billions of dollars in pre tax accounting growth brought about by exchanging shares of credit card giant Visa, but analysts say this will not attract too much attention from market observers.

The profit of a bank is the difference between deposit expenses and loan income. Due to high deposit costs, weak loan demand, and longer than expected Federal Reserve interest rate cuts, the profits of these four banks are expected to decline compared to the previous quarter, making it difficult for even the largest banks to cope with these challenges.

In addition, the performance of large banks may reveal the cautious stance taken by these lenders in terms of credit, as higher interest rates pose more challenges for borrowers. The new provisions set aside by the four major banks to offset future loan losses are expected to increase by 26% compared to the previous quarter. By contrast, data from the Federal Reserve shows that earlier this year, the speed of loan loss provisions for all commercial banks had begun to stabilize, increasing by only 0.30% this quarter.

On the other hand, investment banking fees for the four major banks, as well as Wall Street's Goldman Sachs and Morgan Stanley, are expected to increase significantly compared to the same period last year, with an average increase of over 30%. Goldman Sachs and Morgan Stanley will announce their performance on July 15th and 16th. The major event that all banks are waiting for is the Federal Reserve's final decision to begin lowering the highest interest rate in 23 years. At present, the market expects it to happen as early as September.

For smaller regional banks, the earlier the interest rate cut, the better. They rely more on loan income, so they are more affected by the decline in net interest income of the entire industry. They are also more susceptible to the impact of the sluggish commercial real estate market. This year, investors have lowered the stock prices of various regions and small banks due to new issues or concerns.

Overall, due to the long-term high interest rates, the US banking industry is under tremendous pressure. The increase in bad debts caused by credit deterioration, as well as the competition caused by rising deposit costs, may lead to a decrease in the net interest income of banks. At present, as these large banks release their second quarter financial reports one after another, investors are no longer worried about the expected decline in net interest income. On the contrary, they expect these banks to release optimistic prospects for fee based businesses such as investment banking, and also expect signals from at least some banks that loan profits are expected to rebound.

Through these observations, we can see the response strategies and future directions of the banking industry in the face of challenges. In this environment, investors need to closely monitor the performance reports of banks and policy changes of the Federal Reserve in order to make wiser investment decisions.