US Banks Face Gloomy Earnings Season... Earnings Forecasts Downgraded Amid SVB Aftermath

Q1 Earnings Announcement of Major Banks on the 14th

Major U.S. banks such as Citigroup, JP Morgan, and Wells Fargo are preparing to announce their first-quarter earnings this year, while Wall Street is reportedly lowering profit forecasts for the banking sector, the Wall Street Journal (WSJ) reported on the 13th (local time). The combination of loan reductions following the Silicon Valley Bank (SVB) collapse and expanding losses on U.S. Treasury investments is expected to limit profits.

[Image source=Reuters Yonhap News]

Morgan Stanley recently lowered its earnings per share (EPS) forecasts for 13 major U.S. banks by 4% compared to previous estimates for this year. The profit forecast for next year was cut by 15% from prior projections.

It is expected that the earnings of mid-sized banks will deteriorate further. Morgan Stanley revised down the EPS forecasts for mid-sized banks by 17% for 2023 and 27% for 2024, respectively.

Global investment bank Evercore ISI stated in an investor memo last week, "This earnings season will be the most challenging period for mid-sized banks since the 2008 financial crisis," adding, "Too many things are going in the wrong direction, and potential risks are lurking."

A major cause of the decline in bank profits is the visible contraction in loan supply following the SVB incident. Banks facing liquidity crises are tightening lending. Signs of credit tightening for households and businesses are gradually emerging. According to a survey by the Federal Reserve Bank of New York, the proportion of households reporting difficulty obtaining bank loans last month reached the highest level since the survey began in 2013. Morgan Stanley expects the net interest margin (NIM) of major banks to be 0.5% lower than previously forecast, and mid-sized banks to see a 0.5% decline as well.

Another burden is the sharp withdrawal of deposits, which had been a low-cost funding source for banks, following the SVB collapse. According to the Federal Reserve, $312 billion in deposits were withdrawn from U.S. banks in March alone. While the top 25 banks by assets in the U.S. saw an inflow of $18 billion, mid- and small-sized banks experienced an outflow of $212 billion. Smaller banks are forced to sell U.S. Treasuries, heavily invested in during the COVID-19 period, at a loss to raise funds for deposit returns. According to the Federal Deposit Insurance Corporation (FDIC), unrealized losses on bonds held by banks reached $620 billion at the end of the fourth quarter last year.

As bank profitability worsens, shareholder dividends are also expected to decrease.

The WSJ noted, "Deposit outflows are depleting the low-cost funds that have boosted bank profitability in recent years, hitting smaller banks harder than large ones," and added, "The anticipated loan contraction will further deteriorate bank profitability, and book losses on bond portfolios may limit shareholder returns."

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