The banks rounded out a mixed earnings season and most of the major U.S. financial institutions such as JPMorgan, Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs, have already reported their Q4 financial results. In this earnings season, the primary focus extends beyond the quarterly figures themselves to the management’s insights on the 2024 outlook and the return to revenue growth.

2023 marked by the collapse of Silicon Valley Bank, Signature Bank, First Republic, and Credit Suisse as interest rates reached their highest levels in 40 years. Despite the banking crisis, financial metrics for the major U.S. were robust.

JPMorgan, the largest U.S. bank by assets and often considered a bellwether for the rest of the market, was the standout performer in the banking sector this earnings season. Despite a 15% decline in Q4 profits from the prior year to $9.3 billion, JPMorgan achieved a record-breaking annual profit of $49.6 billion.

Overall, the top five banks reported a 21.2% decline in earnings compared to the same period in 2022, with a combined net income of $19.73 billion. Credit costs witnessed a widespread increase across all banks and revenue growth has been mixed.

Most of the top five banks see net interest income, which is a key profit metric that shows the difference between what the bank earns from lending and the interest it pays out on deposits, improving in the second half of 2024, when the expected Federal Reserve interest-rate cuts would begin to improve their bottom lines.

The five biggest banks on Wall Street are of the view that the U.S. economy is likely to avoid a recession, but that would depend on the timing and frequency of interest rate cuts by the Federal Reserve. Most banks see a recovery in deal and IPO markets in 2024, which should be bullish for stocks.

Source: TradingView, SPDR Select Sector Fund – Financial (XLF)

The banking sector can benefit from the Federal Reserve interest rate cuts, as the cost of funding declines, while the value of their long-term lending increases, enhancing their financial performance. However, the market’s expectation of six rate cuts, in contrast to the Fed’s projection of three, could significantly impact bank profits and the broader economic growth.

While the labour market resilience, continued economic growth albeit at a slower pace, and decreasing inflation support the notion of a « slow landing, » any deviation from the expected Federal Reserve actions may pose challenges for banks in generating profits, especially in global mergers and acquisitions, housing, and consumer lending.

As U.S. equity markets trade near record highs and our long-term outlook on the S&P 500 is around 5,300, the banks may play a pivotal role in extending the previous year’s rally. The main risks the banking sector faces is a significant slowdown of the economy, lower provisioning, a rise in non-performing loans, sticky inflation, and a delay in the expected interest rate cuts.