Key Items to Watch After Second-Quarter Money Center Bank Earnings
- JPMorgan Chase JPM: At what pace are they able to gain share? Will they be able to earn these net interest margins when the short end of the curve heads lower?
- Bank of America BAC: How do the dynamics around repricing of long-duration loans and securities impact net interest income?
- Wells Fargo WFC: At what pace are they able to grow their balance sheet after lifting the asset cap?
- Citigroup C: They’ve seen continued progress in their turnaround efforts. How do they perform when the external environment becomes unfavorable?
US Bank Management Outlook on Economy
Almost everyone sounded positive here. We heard some commentary on some weakness in lower-income segments, but nothing too extreme. Most major macro indicators remain solid, with consumer spending volume growth at about 4%.
Our Thesis on the US Banking Sector
Major risks around sharp rate cuts, trading normalization, elevated asset prices, fiscal deficits, higher credit costs, and trade and tariff policy have not really materialized in the recent quarters, and it seems the market is largely discounting them. We think there is a scenario in which money center banks do well in the near term, but it’s also possible their fundamental performance deteriorates.
The market is fully convinced about the bright near-term outlook, as reflected in valuations, but we would warn investors about the possibility of a negative surprise. Near-term profitability will most likely be strong, but our fair value estimates are predominantly a function of long-term performance, and we model some normalization.
Changes to 2025 Guidance
There weren’t many changes to guidance. Wells Fargo’s net interest income guidance was slightly revised downward, leading to a correction in the stock’s price. The reaction to this revision was exaggerated, in our opinion.
What Could Lift US Bank Stocks Further?
We see it as unlikely, but the M&A and investment banking boom story can still play out. Investment banking revenue should be higher than the current levels, but not massively so.
The biggest thing that can drive stocks even further is loan growth. Bank balance sheets have a lot of room to substantially grow loan balances because of low loan/deposit ratios, a lot of liquidity, and tons of excess capital. Substantial pickup in loan growth (especially on the commercial side) can be a big boost to NII and EPS.
US Bank Capital
The administration has created a lot of excitement about capital requirements and deregulation. These things are inherently uncertain, but it looks like sentiment is moving in the right direction. The Federal Reserve previously relaxed statutory liquidly ratio requirements, and the results of the stress test would also reduce stress capital buffers for all four banks. This means lower capital requirements and higher capital return (mostly through buybacks, but also through higher dividends).
The next big regulatory change would be around global systemically important bank charges. US banks have a slightly different methodology than other international banks, and their GSIB surcharge is higher. If the Fed relaxes its GSIB methodology or adopts the international one, it will make a substantial difference to money center banks.
Deposit and Loan Growth
Bank deposits stopped declining in late 2023 and have been growing steadily since. Deposit growth is largely a function of monetary policy and money supply. We expect deposits to continue to grow in the upcoming year. If the Fed eases its monetary policy faster, it can lead to higher growth in 2026. Deposit growth won’t be the binding factor for loan growth in the near term, given the amount of liquidity in the system.
One of our biggest takeaways from the quarter was a material pickup in commercial loan growth. There were some signs of this in the previous quarter, but this quarter was really good for most banks. Some of this growth was because of temporary factors (higher credit line utilization due to tariff uncertainties, inventory buildup), but some signs point to it being a sustained phenomenon. Commentary suggests loan growth picked up in the latter part of the quarter.
Credit card balances had recovered by the end of 2023, and we now see much lower growth in that business as well. Consumer loan growth is still lagging. Lower rates should enable faster growth in upcoming years.
Net Interest Income
This will depend a bit lot on the interest rate outlook, which has been changing rapidly. Two to three rate cuts are expected this year. On the positive side, even if we have some net interest margin compression due to rate cuts and banks being asset-sensitive, that should be offset by balance sheet growth for money center banks. This is part of the reason the market is not worried about rate cuts that much.
Additionally, rate cuts mean more deposit and loan growth, so in a sense, it balances some of the impact of NIM compression. Still, the outlook for NII could be materially different amongst banks.
Citigroup surprised us to the upside this quarter with its NII. Well Fargo’s guidance was slightly disappointing. JPMorgan grew its balance sheet fast enough to offset any impact of NIM compression. Bank of America maintained its guidance for 2025. Bank of America management also made a comment in passing about 6%-7% NII growth in 2026.
Credit Costs/Provisions/Allowances
Nothing was out of the ordinary here. The economic outlook is strong, and provisions reflect that.
Fee Income
The banks’ fee-based businesses are doing relatively well. Card-related fees and service charges are resilient fee streams, and are performing as expected. Asset and wealth management management fees and brokerage fees are benefiting from buoyant valuations. Investment banking was decent across its segments, and its revenue risks are to the downside in 2026.
Trading revenue can be highly volatile, but the last two quarters have been good for banks. This business can benefit during periods of increased volatility in the markets as bid-ask spreads widen, and increased volatility also leads to higher transaction volume. We think trading revenues are near cyclical peaks and are about 20%-30% higher than midcycle levels. This revenue has pretty high operating leverage.
US Bank Stock Valuations
We do not like money center banks’ valuations. JPMorgan is expensive but very high-quality. Citigroup can be though of as high-risk, high-return name.
