S&P 500 Financials Sector Q4 Earnings Preview: Banks Lead Earnings Decline

The Financials sector will be a focus for the market during the next two weeks, as more than 70% of the S&P 500 companies that are scheduled to report earnings for the fourth quarter over this period are part of this sector. Companies in this sector 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 fourth-highest (year-over-year) earnings decline of all 11 sectors for Q4 at -3.1%.

At the industry level, two of the five industries in the sector are expected to report year-over-year earnings growth, led by the Insurance industry at 26%. This industry is also expected to be the largest positive contributor to year-over-year earnings for the sector. If the Insurance industry were excluded, the estimated (year-over-year) earnings decline for the Financials sector would increase to -8.9% from -3.1%. At the sub-industry level, all five sub-industries in the Insurance industry are expected to report year-over-year earnings growth. Three of these five sub-industries are predicted to report double-digit earnings growth: Property & Casualty Insurance (48%), Reinsurance (30%), and Multi-line Insurance (17%).

Stewart Johnson, Associate Director for Deep Sector Content at FactSet, highlighted a number of key themes and metrics to watch for insurance companies in the S&P 500 during the Q4 earnings season, which kicks off in the second half of January:

“P&C sub-industry estimates reflect expectations for a healthy increase in YOY earnings, which likely stems from an anticipated improvement in YOY claims experience. Following prior upticks in claims losses, management should provide details regarding underwriting experience as well as any efforts to boost product prices. Results of pricing efforts will be especially important to the future earnings of big writers of homeowners and personal auto lines.

“Multi-Line and Life & Health sub-industries should benefit from rising interest rates, as well as the higher market index levels. Rising rates should boost interest earned on the fixed income investments that dominate life & health company investment portfolio, while higher market indexes bode well for asset management fees driven by performance and levels of assets under management (AUM).

“Insurance companies with investment management and wealth management businesses should discuss AUM levels for fixed income and equity portfolios. Recent changes and flows in AUM balances provide important indications of future fee income. Investment portfolios that include real estate investments should also include updates on appraised values, LTV metrics, and any changes to internal ratings.”

For more commentary and analysis on the insurance industry, please see Stewart’s articles on the FactSet Insight blog. 

The Financial Services industry is projected to report the second-highest (year-over-year) earnings growth rate in this sector at 10%. Both sub-industries in this sector are expected to report earnings growth: Multi-Sector Holdings (30%) and Transaction & Payment Processing Services (2%).

On the other hand, three industries in the sector are expected to report a year-over-year decline in earnings, led by the Banks industry at -21%. This industry is also expected to be the largest negative contributor to year-over-year earnings for the sector. If the Banks industry were excluded, the Financials sector would be expected to report year-over-year earnings growth of 8.8% rather than a year-over-year decline in earnings of -3.1%. At the sub-industry level, both the Diversified Banks (-18%) and Regional Banks (-40%) sub-industries are expected to report year-over-year declines.

Sean Ryan, VP/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:

“When bank earnings kick off on Friday, January 12, attention will be focused primarily on 1) the impact of the sharp decline in interest rates during the quarter; 2) the level (and breadth) of credit quality deterioration; and 3) updates to 2024 guidance in light of more benign rate and GDP expectations. 

“The 69bp decline in the 10 year Treasury yield during 4Q23 (almost perfectly mirroring the 76bp increase in 3Q23) is a substantial positive for bank capital levels, although we note several banks announced large restructurings of their bond books during the quarter, and more will likely disclose such along with earnings. Time will tell whether this was farsighted, or an ill-timed locking in of losses at the bottom. The effect on NIMs is more mixed. While it theoretically means an end is in sight for increasing funding costs, the lags in deposit pricing suggest that they will generally trend upward well into 2024, continuing to pressure NIMs. 

“On credit, the decline in rates is unlikely to bring much solace to the CRE market. Relative to expectations, community banks may be positioned to outperform, however, as the types of CRE found in their portfolios holds up better than the collateral getting the most media attention (though we note that this is a general observation, and within the large population of community banks, there will inevitably be some sloppy underwriters revealed at this stage of the cycle).  

“Among non-interest revenues, mortgage will remain very weak, reflecting both seasonality and the reality that the Q4 retracement in rates wasn’t of sufficient magnitude to cure the post-ZIRP affordability problem, let alone revive the refi market. Elsewhere in consumer lending, credit card delinquencies and charge-offs will continue their increase, particularly in lower credit bands (seen most plainly in private label). That subprime weakness should also be increasingly evident in auto credit, particularly on loans in COVID-affected vintages as borrowers find themselves much further underwater than historical norms. While both of those business lines are afflicted with deteriorating credit, the decline in rates will tend to drive their NIMs in opposite directions; variable rate card margins should compress while fixed rate auto loan margins should widen. 

“Investment banking revenues should remain relatively weak, with M&A remaining more so than underwriting. Management commentary regarding the outlook for M&A may be especially interesting, given the crosscurrents of cheaper financing but higher valuations, and the heightened market belief in a soft landing scenario. Wealth management revenues will benefit from the impact of the year-end rally on both equity and fixed income AUM, as well as from more firms moving past the worst cash sorting headwinds.

“We continue to anticipate more actions on expense control, in the form of both formal programs, and layoffs. Larger banks will face relatively more such pressure to attack costs, given higher capital markets exposure, and the growing need to fund AI-related investments.”

For more commentary and analysis on the banking industry, please see Sean’s articles on the FactSet Insight blog.

The other two industries projected to report year-over-year decreases in earnings are the Consumer Finance and Capital Markets industries. The Consumer Finance industry is predicted to report the second-largest (year-over-year) decline in earnings at -6%, while the Capital Markets industry is projected to report the third-highest (year-over-year) decline in earnings at -3%. At the sub-industry level within the Capital Markets industry, the Financial Data & Exchanges (17%) sub-industry is the only sub-industry expected to report year-over-year earnings growth, while both the Investment Banking & Brokerage (-14%) and Asset Management & Custody Banks (-3%) sub-industries are expected to report year-over-year earnings declines.

Looking ahead, analysts are predicting earnings growth rates of 2.4%, 5.6%, 0.6%, and 24.2% for Q1 2024 through Q4 2024 for the Financials sector.

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