Stock Market »US Bank Earnings Overview

US bank first quarter earnings snapshot »Rate hikes, recession fears and war in Ukraine

US banks kick off their earnings season on April 13 and come at a time when bank stock prices are underperforming the stock market relative to the broader market. Interest rate hikes, recession fears and the war in Russia mean there will be a lot to watch.

Earnings season for US banks in the first quarter

Banks kicked off their Q1 2022 earnings season on April 13 with JP Morgan, followed by Citigroup, Wells Fargo and Goldman Sachs on April 14 and Bank of America on April 18.

What to watch?

The first quarter was a tough quarter for all stocks, including banks. The S&P Banks Index has traded 11% lower year-to-date, underperforming the broader S&P Index, which was trading 6% lower this year.

While soaring inflation and the prospect of higher interest rates, strong consumer spending and loan growth will generally stimulate banks, a number of downsides could also affect Q1 earnings and keep prices under pressure. of shares in the stock market.

Source: Tradingview, Stone X

Higher interest rates, but is the Fed trying to move too fast?

The Fed raised interest rates at its March meeting for the first time since 2018. The US central bank is raising rates by 25 basis points and is expected to raise rates by another 50 basis points at the March meeting. May and maybe again at the June meeting. The outlook is for a higher interest rate environment, which means a higher interest margin for banks. This benefits banks considerably.

Higher interest rates have been in the pipeline for a while, so they may be priced right now. One of the fears that has gripped banks is that the Fed will act too aggressively, tighten monetary policy and push the US economy into recession. The recent reversal of the yield curve, often seen as a warning of recession, adds to these concerns.

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Russian risks

Bank stock prices were hit hard in the stock market during the war and failed to rebound as fast as other stocks. Fluctuations in asset prices, business losses, bad debt write-downs, and the costs of closing down businesses in Russia or Ukraine could quickly offset the gains made from rising interest rates and rising loans.

While market volatility has been high, which could be good for the arms trade, the trade has been very volatile, which could be bad news for traders. There is also increased counterparty risk when bank customers are under stress, particularly in commodity transactions.

In addition, there are operational risks to ensure compliance with sanctions and increased cyber threats, leading to increased costs.

Result of Russian operations

Citibank has struggled in recent years and has the potential for great success from the Russian war. Not only is it open to market exposure, but its consumer bank in Russia is also likely to suffer losses. Total exposure to Russia is around $ 10 billion, and Citigroup has warned it could lose half of that in an extreme scenario.

Citigroup’s decision to withdraw from Russia and reduce its exposure increases the likelihood of a substantial loss. JP Morgan and Goldman Sachs also said they were declaring settlement transactions in Russia and were not looking to take on new business there. Banks have largely experienced earnings downgrades, with Citi Group experiencing steeper downgrades than its peers, which explains its steeper selloff.

Conclusion

Despite rising interest rate expectations, major banks underperformed the equity market as investors became increasingly concerned about the economic outlook, a reversed yield curve and fallout from the Russian war. The Citi group may be one of the hardest hit in the earnings season.

Edited by Fiona Cincotta, FOREX.com »Official site

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Disclaimer: The information and opinions contained in this report are provided for general information purposes only and do not constitute an offer or solicitation to buy or sell any forex or CFD exchange contracts. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and assumes no responsibility for any direct, indirect or consequential damages that may arise from the fact that someone relies on such information.

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