US bank profits to shrink on interest income, focus shifts to Fed cuts

By Nupur Anand

NEW YORK (Reuters) -JPMorgan Chase and Wells Fargo kick off earnings for the sector on Friday, and investors are expected to focus on the big banks' forecasts for net interest income after strong jobs data fueled uncertainty about the path of future Federal Reserve rate cuts.

Both banks are expected to report lower profits for the third quarter after interest income may shrink while loan demand remained subdued.

The sector reaped a windfall in net interest income (NII), or the difference between what they earn on loans and pay out for deposits, in recent years as the Fed raised rates.

"Weak loan growth, higher deposits, increase in loan loss provisions due to a higher unemployment rate -- all of this will result in pressure on margins and will moderately bring NII down," Stephen Biggar, banking analyst at Argus Research said.

Any additional rate cuts could shrink banks' income from interest payments, but also spur more borrowing and dealmaking.

"With our economists anticipating another 150 bps (basis points) of rate cuts by mid-2025 and expecting the U.S. economy to avoid a recession, we expect the focus to shift quickly to forward outlooks," Betsy Graseck, a banking analyst at Morgan Stanley, wrote in a report published on Sept. 30.

Investment banking divisions likely saw a pickup in activity in the third quarter as volumes rose in debt issuance, equity follow-on offerings and initial public offerings. Mergers and acquisitions remained muted, analysts said.

Oppenheimer forecast an average of 7% rise in investment banking revenues for all banks, a good increase but one that falls short of a rebound to historical levels.

Trading divisions likely got a boost from a resurgence in market volatility, but their revenue may still decline versus the second quarter given a typical seasonal slowdown in the third quarter, Moody's analysts wrote in a report.

While the weakness in office loans has been a source of industry concern for years, banks have set aside large reserves to cover potential losses, analysts said. C

Consumer loan delinquencies, meanwhile, are beginning to plateau as banks tighten underwriting in the wake of last year's banking crisis appears, industry executives have said in recent months.

Here are key expectations for the six biggest U.S. banks:

JPMORGAN CHASE

The largest U.S. lender is expected to report a nearly 8% drop in its earnings per share, according to estimates compiled by LSEG, as its NII slides from the second quarter.

HSBC analyst Saul Martinez predicted NII would fall 1.2% from the second quarter as deposit margins shrink and loan growth stays subdued.