U.S. banks are likely to report strong results for the second quarter, but earnings for the period will not be as important as bankers' outlook for future quarters, analysts said.
The coming storm
Concurring with Jamie Dimon's recent statement on the potential for a recession, Wedbush analyst David Chiaverini said an economic storm is building on the horizon and could become a hurricane but current weather appears sunny thanks to solid loan growth, expanding net interest margins and strong credit trends.
"Peering through the telescope six months ahead brings into focus potential challenges related to weakening loan demand as the Fed works on slowing the economy, higher deposit betas than the last tightening cycle which could dampen NIM expansion, slowing deposit growth as the Fed removes liquidity from the banking system, and higher credit costs given unsustainably low levels," Chiaverini wrote.
Regional banks will start reporting earnings on July 15. Of the 68 public banks with total assets between $10 billion and $100 billion and at least five GAAP EPS estimates from analysts, consensus estimates forecast a linked-quarter EPS decline for 25, according to S&P Global Market Intelligence data.
Banks are likely to report solid profits for the second quarter, but tangible book value will likely decline between 1.5% and 2.5%, Janney Montgomery Scott analyst Chris Marinac said, reflecting changes in other comprehensive income, which tracks gains and losses in the market value of significant portions of banks' bond portfolios. Additionally, Marinac expects the second quarter to be very good for loan growth but earnings calls will clarify the extent to which banks saw any pricing advantage.
"Loan pricing benefits are going to be much more stacked to third quarter and first quarter, but I do think a little bit of signs of expansion of margin should be there, so the next piece of the puzzle is that deposits most likely are down slightly," Marinac said.
Loan growth remained strong in the second quarter, but deposits slipped near the end of the quarter, and it's difficult to know how period-end change on balance sheets will compare to the average for the whole quarter, Marinac said. Bankers will need to strike a balance of being confident and assertive without excessive optimism, Marinac said, adding bankers will need to explain to investors how a recession is not likely to be as severe as the 2008 financial crisis in order to "talk them off the ledge."
"It's vastly different than the great financial crisis," Marinac said. "Management teams have to give that update every single quarter. They have to remind people that it's different. This is why it's different. Here's the data, because people just gravitate toward the last crisis they lived through."
Credit, mortgages and expenses
Credit quality should be excellent in the second quarter, but the period's earnings are just the tip of the iceberg and will take a backseat to banker outlook on loan and credit, which will be especially important this quarter as many investors fear a looming recession, Marinac said.
"It can be positive on margin expanding, which I think is possible, but I also think there could be some caution about how loan growth is going to shape up and how many business opportunities there are."
Specifically, outlook on mortgage growth, which slowed down in the last two quarters, will be something to keep an eye on and will vary from bank to bank depending on how substantial their mortgage business is, Marinac said. In addition, expenses such as compensation and wages are likely to be greater this quarter amidst high inflation, with the caveat that banks that paid social security and annual merit expenses in the first quarter may see less growth in expenses in the second quarter.
"It's just hard to know in any given quarter how much of that is going to come through. I kind of look at expenses as a bit of a wild card of the quarter," Marinac said.