U.S. banks will probably report stronger earnings this week, fueled by robust dealmaking and trading in the fourth quarter.
The six biggest U.S. lenders have benefited from a resurgence in investment banking in recent months. JPMorgan Chase (JPM.N), Wells Fargo (WFC.N), Citigroup (C.N) and Goldman Sachs (GS.N) will kick off results on Wednesday, followed by Bank of America (BAC.N) and Morgan Stanley (MS.N) on Thursday.
"Investment banking is very upbeat," said Goldman Sachs banking analyst Richard Ramsden.
He noted that private-equity-backed deals are likely to pick up.
"Valuations have improved, prospects for divestitures, either through IPOs or through sales, have improved, and financing conditions for buyers have also improved."
A steeper yield curve for U.S. Treasuries will also support lenders' profits. The steepening curve enables banks to borrow money at lower short-term interest rates and make loans at higher long-term rates, boosting their income from interest payments.
Revenue from investment-banking fees jumped 26% in the fourth quarter from a year earlier, buoyed by rising deal volumes and strong demand for bond underwriting, Dealogic data showed.
Trading revenues surged to a record $224.6 billion in 2024, according to an estimate from analysis firm Coalition Greenwich. That would narrowly beat the previous 2022 record, when Russia's invasion of Ukraine spurred market volatility.
Investors will pay close attention to bank executives' commentary on net interest income, the difference between what banks earn from loans and what they pay for deposits.
NII broadly improved in the second half of last year, in part because the Federal Reserve's rate cuts eased pressure on banks to pay more to depositors to keep funds parked in their accounts.
"We're entering the year with a much more favorable outlook for banks," said David Wagner, portfolio manager at Aptus Capital Advisors LLC. "Capital levels are much improved, the yield curve has steepened, capital markets are healthy, and asset-quality trends remain solid."
Ramsden, the Goldman analyst, expects NII to grow by mid-single-digit percentages across the industry in 2025, while total fees will likely climb by mid-to-high single digits.
Lenders will likely retain more earnings as they refrain from setting aside more rainy-day funds.
"Banks have been cautious and added to reserves over the past year for a slowing economy that hasn't really occurred, and with employment remaining low, we don’t see large additional reserves needed," said Stephen Biggar, analyst at Argus Research.
Source: Mean estimates compiled by LSEG
