- Reuters/ Natalie Behring
Third quarter earnings are on the way and big banks will lead off a season that is being approached with outright dread in some corners of the market.
With prospects dimming that the Federal Reserve will raise rates in 2015, big banks are facing the prospect of cheap money being a hindrance.
Until interest rates begin to rise, the returns from lending money will remain relatively low.
Commodity shocks also reverberating through the financial system. Bank trading desks have been hit, while banks’ may have to take additional write-downs on energy-related loans.
Business Insider rounds up what bank analysts are looking for – and what’s worrying Wall Street banks:
Fixed income trading could provide a nasty surprise
- REUTERS/Neil Hall
Barclays analysts said Friday that while several banks had already pointed to a decline in trading revenues, the end of the third quarter would likely mean the declines were steeper than initially suggested.
“We believe the end of 3Q15 was incrementally more challenging. As such, we expect trading revenues to decline at a greater than initially advertised pace.”
Mortgage originations could fall
Big banks have been stepping away from mortgage originations, with lending standards tightening. Christopher Whalen, senior managing director at the Kroll Bond Rating Agency, said that mortgage origination in the second half of 2015 probably won’t be as strong as it was for the first half of the year. JP Morgan, for example, has backed away from Federal Housing Administration loans and CEO Jamie Dimon suggested President Barack Obama’s administration showing a prosecutorial zeal for big banks was to blame.
Net interest margin with rates remain low (thanks to the Fed)
- REUTERS/Robert Galbraith
The net interest margin a bank earns is the difference between income generated by lending and the income paid out by the bank to its own lenders. A zero-percent interest rate doesn’t allow much wiggle room for net interest margin – and as a result, it’s been holding big banks back. It’s not even clear banks’ net interest margin will be impacted immediately when rates rise. Expectations that rates will rise in 2015 have fallen recently.
Barclays said in a note on Friday: “When banks set their 2015 budgets last year, many assumed rate hikes, some as early as mid-June. In conjunction with an expected increase in net interest income, we believe several also baked in increased investment spend. Still, as 2015 played out, interest rates ultimately have not increased.
“As such, with revenues below plan, banks have the option of scaling back investments or missing their efficiency ratio expectations. We believe several forged ahead with spending plans, taking a longer-term view. Still, this could pressure 3Q15 results and 4Q15 guidance.”
Investment banking fees will fall
“Expectations for banking are down, single-digits,” said Kenneth Leon, global research director at S&P Capital IQ, who covers investment banks including Morgan Stanley and Goldman Sachs.
One area in which most banks are certain to disappoint: IPOs. Market volatility, notably in China, held back public offerings in the third quarter.
“IPOs have been weak all year,” Leon told Business Insider.
Here’s when earnings are coming, and what analysts expect
FactSet breaks down earnings-per-share projections for every company, every quarter, and this is what their outlook says:
JPM: $1.38 (compared to $1.36 for third quarter 2014)
BAC: $0.34 (compared to -$0.01 for third quarter 2014)
WFC: $1.04 (compared to $1.02 for third quarter 2014)
C: $1.29 (compared to $1.07 for third quarter 2014)
GS: $3.26 (compared to $4.57 for third quarter 2014)
MS: $0.64 (compared to $0.44 for third quarter 2014)