S&P 500 Financials Sector Q1 Earnings Preview: Banks Expected to Report Largest Decline

The Financials sector will be a focus for the market during the next two weeks, as 50% of the S&P 500 companies that are scheduled to report earnings for the first quarter over this period are part of this sector. Companies in the Financials sector that are expected to report earnings during these two weeks include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. The Financials sector is predicted to report the sixth-highest (year-over-year) earnings growth rate of all eleven sectors for Q1 at 0.7%.

At the industry level, three of the five industries in the sector are expected to report year-over-year earnings growth, led by the Insurance industry at 37%. This industry is also expected to be the largest contributor to year-over-year earnings for the sector. If the Insurance industry were excluded, the Financials sector would be expected to report a (year-over-year) decline in earnings of -6.0% rather than a year-over-year increase in earnings of 0.7%. At the sub-industry level, all five sub-industries are expected to report year-over-year earnings growth. Four of these sub-industries are predicted to report double-digit earnings growth: Property & Casualty Insurance (87%), Reinsurance (62%), Life & Health Insurance (12%), and Multi-line Insurance (12%).

The other two industries projected to report year-over-year increases in earnings are the Consumer Finance and Financial Services industries. The Consumer Finance industry is predicted to report the second-highest (year-over-year) earnings growth rate at 13%, while the Financial Services industry is projected to report the third-highest (year-over-year) earnings growth rate at 11%. Both sub-industries in the Financial Services industry are expected to report earnings growth: Multi-Sector Holdings (19%) and Transaction & Payment Processing Services (7%).

On the other hand, two industries in the sector are expected to report a year-over-year decline in earnings, led by the Banks industry at -18%. This industry is also expected to be the largest detractor to year-over-year earnings growth for the sector. If the Banks industry were excluded, the estimated earnings growth rate for the Financials sector would increase to 14.2% from 0.7%. At the sub-industry level, both the Diversified Banks (-16%) and Regional Banks (-28%) sub-industries are expected to report year-over-year declines in earnings.

Sean Ryan, VP/Associate Director for the banking and specialty finance sector at FactSet, highlighted a number of key themes and metrics to watch for banks in the S&P 500 during this earnings season:

Bank earnings season begins on Friday, April 12, and is likely to be characterized by mixed spread revenue trends, relative strength in fee income (with some corresponding pressure on expenses), and further reserve building amid continued mean reversion in credit quality. Key areas to watch include signs of net interest margins bottoming (some banks are hitting the inflection point, while for others it may be a few quarters off), any acceleration of credit deterioration (or broadening out beyond known areas such as CRE and credit cards), and for universal banks, management commentary around the durability of the investment banking improvement year-to-date.

The interest rate environment was a marginal negative in the first quarter; the 32bp increase in the 10-year yield implies banks will give back some of their OCI gains from the fourth quarter of 2023 (during which the yield dropped 69bps). At the short end of the curve, while Fed Funds futures continue to discount rate cuts, the trajectory moderated further; futures now imply that the June FOMC meeting will see the first of three 25-bp cuts in 2024, with another three priced in for 2025. Welcome as that would be, it is a less bullish outlook than had been priced in three or six months ago.

Nonetheless, with the course of rate hikes seemingly having run its course, pressure on deposit costs should continue to decelerate, with several banks likely to post improved net interest margins for the first quarter, and more likely to guide to the same for 2H24.

Noninterest revenues should be a relative bright spot. Investment banking revenues should see strong gains, and while M&A results will remain the weak link, the quarter saw an uptick in announced transactions. The increase in mortgage applications, including refis, during the quarter should translate into improved revenues, though the overall level remains weak. First quarter market performance should bolster AUM in both wealth and asset management, though flows for the latter remain a mixed bag. 

Credit should remain a swing factor; the problems afflicting commercial real estate are well understood at this point, but both overall, and in the pockets with the greatest deterioration—CRE and credit cards—the rising delinquencies and charge-offs continue to reflect mean reversion from unsustainably low levels, rather than the traditional downside of a credit cycle. So while incremental deterioration (and related reserve building) are expected, we would look for any signs of either an acceleration of the credit deterioration, or a broadening out of distress to other loan portfolios.

For more commentary and analysis on the banking industry, please see all of Sean’s recent articles.

The Capital Markets industry is projected to report a (year-over-year) earnings decline of less than -1%. At the sub-industry level, the Financial Exchanges & Data (6%) and Asset Management & Custody Banks (5%) sub-industries are expected to report year-over-year earnings growth, while the Investment Banking & Brokerage (-7%) sub-industry is expected to report a year-over-year earnings decline.

Looking ahead, analysts are predicting earnings growth rates for the Financials sector of 5.2%, 0.5%, and 42.2% for Q2 2024, Q3 2024, and Q4 2024, respectively.

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