Five areas to keep an eye on as banks report third-quarter results

Over the past two years, many banks’ earnings have been hit by a combination of increased deposit costs and subdued loan demand.

After the Federal Reserve’s decision last month, those headaches should subside – but perhaps not immediately reduce its key interest rate. The 50 basis point reduction was the first cut since the pandemic began in March 2020.

As the sector’s third-quarter earnings season begins on Friday, all eyes will be on the cost of deposits, loan growth and therefore net interest income, which is the difference between what banks collect on loans and what they paying for deposits.

JPMorgan Chase, Wells Fargo and Bank of New York Mellon will be the first to report results, followed next week by Citigroup, Bank of America, Goldman Sachs and other large and regional banks.

While analysts expect net interest income to eventually improve as a result of the Fed’s rate cuts, they also expect banks to report near-term pressure in this area. As interest rates begin to fall, there will likely be a gap between when loans and deposits are revalued, they argue.

“We think companies are very excited about the opportunity to reduce deposit costs and will do so very aggressively,” Piper Sandler analyst Scott Siefers said in an interview.

But “the fear” is that banks “may have to take a step back” before they are able to “take a step forward,” he noted.

“In total, [net interest income] “Maybe it takes a little setback before things get better,” said Siefers.

Analysts say three other themes will also be on investors’ minds this earnings season. Credit quality metrics, capital markets operations and the information banks share about their fourth-quarter outlook will be closely monitored, they said.

Here’s a closer look at five areas to keep an eye on as the latest earnings season gets underway.