NEW YORK (Reuters) – Some of the largest U.S. banks are expected to report weaker second-quarter profits, weighed down by lower interest income and the need to set aside larger reserves to offset credit losses, analysts said.

As major banks open the U.S. earnings season on Friday, analysts are forecasting higher provisions for potential losses on commercial and industrial (C&I) loans, as well as commercial real estate.

“A credit cycle occurs during every economic expansion,” says Betsy Graseck, an analyst at Morgan Stanley. “We are cautiously betting on a normalization of the credit cycle,” she adds, referring to the typical levels of losses on bad loans related to consumer and commercial loans.

According to a simulation by the US Federal Reserve (Fed), loss rates on C&I loans are expected to reach 8.1%, compared to 6.7% last year.

C&I loans pose a bigger risk to big banks than they will in 2023, according to the Fed’s latest stress test last month.

Despite this gloomy outlook, major U.S. investment banks are expected to benefit from a pickup in merger and acquisition activity.

Global merger and acquisition volumes reached $1.6 trillion (€1.48 trillion) in the first half of the year, up 20% year-on-year, according to Dealogic data. Capital markets volumes rose 10% over the same period.

Analysts will also be closely watching banks’ comments on interest income, with markets increasingly expecting a Fed rate cut in the coming months.

The stabilization of interest rates made it easier for banks to retain their customers’ funds, which eased competition for deposits.

“Any customers who were going to move their deposits to get a higher rate … probably have,” said Chris Kotowski, an analyst at Oppenheimer. Banks can then use those deposits to reprice lending rates at higher levels.

At the sector level, net interest income (NII), which is the difference between banks’ income from loans and deposits, is expected to bottom out in the second or third quarter before recovering as banks negotiate new loans at relatively higher rates, the analyst said.

Interest rates have collapsed during the pandemic, driving mortgage rates to record lows in 2021 and auto loans to multi-year lows before the Fed raises rates in early 2022.

“Fixed assets, which include mortgages and auto loans, are going to be revalued from a very low rate,” Kotowski adds.

Here’s a list of the main factors to watch, according to analysts, when the six largest U.S. banks announce results:

JP MORGAN

The largest U.S. bank is expected to report a 13% drop in second-quarter earnings per share (EPS) as expenses rise as it invests more in the business.

BANK OF AMERICA

The second-largest U.S. lender is expected to post a 9% drop in earnings per share, driven by a fall in net operating income.

WELLS FARO

Wells Faro’s earnings per share are expected to rise 3%, driven by investment banking fees and lower provisions for credit losses. Net income, however, is expected to flatten.

CITIGROUP

Profit is expected to rise on strength in its services business, which Citi calls its “crown jewel,” and higher investment banking fees.

GOLDMAN SACHS

Profit is expected to more than double from the second quarter of 2023, when it hit a three-year low. Goldman Sachs is expected to benefit from a recovery in trading, combined with a decline in asset writedowns in the consumer sector.

MORGAN STANLEY

Morgan Stanley is expected to post earnings per share up 33%, driven by mergers, acquisitions and capital markets.

BANK BPA T2 BPA T2

2024 2023

JPMorgan ,15 ,75

Chase

Bank {1}.80 {1}.88

from America

Group ,39 ,33

Citi

Wells, 29, 25

Fargo

Goldman ,48 ,08

Sachs

Morgan, 65, 24

Stanley

*LSEG average estimates

(Reporting by Saeed Azhar and Niket Nishant; Editing by Augustin Turpin and Kate Entringer)

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