Profits of the biggest US consumer lenders are likely to see a surge in the third quarter, marking a stark contrast with investment banks who are still struggling with a deal-making slump, say analysts.
The nation’s largest lender JP Morgan Chase set to release last Friday, was forecasted to lead this financial trend with a predicted 25% surge in earnings per share (EPS), according to LSEG estimates.
Conversely, investment banking giants are set to witness significant declines in EPS. Goldman Sachs and Citigroup are poised to shoulder the biggest losses at 35% and 26% respectively. Higher interest rates for longer timespans have impacted everything from banks’ funding and lending capabilities to borrower repayment abilities, security losses, and capital requirements.
A robust US job market that showed a significant increase of 336,000 positions in September alone increases the likelihood of further interest rate hikes by the Federal Reserve. Although the largest lender is positioned well to handle these increases, persistent high borrowing costs could potentially further cool down investment banking activity.
Despite the renewed optimism in the market, investment banking activity remains depressed. According to data from Dealogic, global investment banking fees are down almost 17% in the third quarter from the same period a year earlier to $15.2 billion.
Unrealized losses from securities will show a "significant increase" to as much as $670 billion across the industry in the third quarter, estimated Richard Ramsden, a banking analyst at Goldman Sachs. That compares with $558 billion in the second quarter, according to data from the Federal Deposit Insurance Corporation.
For instance, Bank of America had more than $100 billion of unrealized losses on its securities portfolio that it aims to own until maturity, which has weighed on its shares. Its stock is the worst performer among the top six U.S. lenders, falling nearly 18% so far this year.
The KBW index of bank shares, which includes regional lenders, has dropped almost 23% in 2023.