US bank profits set to rise on higher rates while Wall Street lags

Big U.S. consumer lenders are expected to see a boost in profits during the third quarter, while investment banks continue to face a slowdown in dealmaking, according to analysts. JPMorgan Chase, the nation’s largest lender, is set to kick off earnings for big U.S. banks and is predicted to report a significant 25% jump in earnings per share (EPS) compared to the previous year. This positive trend is expected to continue for consumer divisions of large banks, as the strong job market has supported household spending.

Despite the challenges faced by investment banks, JPMorgan is considered “best positioned” to handle higher interest rates and could surprise the market with stronger-than-expected results. The return of some initial public offerings, such as SoftBank’s Arm Holdings, is seen as a sign of a market revival after months of stagnation. Additionally, the constructive environment and higher investment banking fees towards the end of the year provide further optimism.

However, investment banking activity remains subdued, with global investment banking fees down nearly 17% in the third quarter compared to the same period last year. The outbreak of war in Israel also poses a potential risk to market sentiment. Despite these challenges, analysts believe that a broader improvement for capital markets may not occur until 2024.

Another factor that could impact the banking industry is the surging U.S. Treasury yields, which may shake investor confidence and pose risks to banks holding a large volume of these securities. As rates rise, bond prices fall, resulting in paper losses that would be realized if the banks sold the bonds. Investors have become more cautious about the risks associated with paper losses on bond holdings, particularly after the collapse of Silicon Valley Bank earlier this year.

While regional lenders face some concerns due to their ties to the commercial real estate loan market and weaker balance sheets, large banks’ consumer divisions are expected to remain a bright spot in their earnings. The strong job market has supported household spending, and although consumer delinquencies on loan payments have increased, they remain historically low.

Overall, investors are optimistic about the banking industry’s ability to navigate the challenges posed by higher interest rates and subdued investment banking activity. The positive performance of consumer divisions and the expectation of higher interest rates for a longer period contribute to this optimism. As JPMorgan kicks off earnings for big U.S. lenders, market watchers eagerly await the results, which could set the tone for the industry’s performance in the coming months.