First-quarter earnings reports starting April 14 will provide a first look at how the turmoil in March impacted most banks individually and how the shock has reset financial outlooks.

A scramble to hold onto deposits and secure additional borrowing is broadly expected to accelerate a fall in net interest margins from peak levels, and cuts to consensus forecasts at some banks have already been severe. Consensus projections anticipate sequential drops in earnings per share at 10 of the 15 largest publicly traded banks, according to S&P Global Market Intelligence data.

Bank stocks have already taken a beating in 2023, with the S&P US BMI Banks index down 14.2% as of April 11, and some analysts believe they are likely set up for a relief rally. However, if the funding distress gives way to substantial credit issues in the coming periods, analysts say the shares have further to fall.

"Virtually every investor and banker we speak with these days is convinced that credit quality is on the precipice of a downturn," Piper Sandler analyst Mark Fitzgibbon said in a note April 4. "The group could fall as much as 50%, if history is any guide."

Potentially 'eye-popping' cuts to EPS

Consensus forecasts anticipate sequential revenue and net interest margin declines at nine of the 15 big banks.

Analysts project that First Republic Bank's NIM will collapse by 70 basis points, reflecting large amounts of expensive funding it added in March and a large underwater portfolio of mortgages.

By and large, projected NIM compression was modest at a median of two basis points, which would leave the median year-over-year increase at 64 basis points. There is considerable uncertainty, however, and guidance for future periods will matter the most.

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Meetings with bank executives suggest that "NIMs have peaked and are rapidly contracting given rising deposit costs and thin loan spreads," analysts at Raymond James said in a note April 11. In a separate note April 6, Raymond James analysts said they "expect EPS cuts to be eye-popping [during] the [first quarter of 2023] earnings season in many cases as the 'new normal' takes hold."

Sudden money flows during March are likely to help some banks. Influxes of deposits at presumed too-big-to-fail banks will probably be a positive for guidance at JPMorgan Chase & Co. and Wells Fargo & Co., whose existing net interest income forecasts are relatively conservative, Piper Sandler analyst R. Scott Siefers said in a note April 12. At the four biggest banks, "we would not be surprised to see some opportunity to hold deposits costs in better than at smaller regionals, as their being awash in liquidity should offer them some pricing flexibility."

Credit reserve builds

Analysts expect realized credit losses to remain relatively low in the first quarter, but credit loss provisions will continue to increase.

For the 15 big banks, the median consensus forecast for net charge-offs to average loans of 27 basis points would be four basis points higher sequentially but lower than the median of 31 basis points in the first quarter of 2021. Analysts expect provision expenses to be higher sequentially at nine of the banks.

In outlook updates in early March before the bank failures, banks including Citigroup Inc. and Fifth Third Bancorp provided relatively stable guidance for provisions, citing an economic environment that had not deteriorated since the end of the year and stating that reserve builds would reflect loan growth.

The stress in the banking sector has increased economic uncertainty, and analysts have predicted precautionary builds.

Jefferies analysts projected in an April 11 note that peak allowance ratios will materialize late in 2023 or early 2024, which they said, "is a modest negative from an investing perspective, as the uncertainty related to income statement effects will linger for longer."

"Banks should look for any way to build the reserve," Christopher McGratty, head of US bank research for Keefe Bruyette & Woods, said in an interview. "The sooner banks can get the peak reserves, the better."