As Wall Street has bank earnings in focus this week, investors should take the following factors into consideration.
Profit Margins
In 2023, investors in banks have both good and bad news to consider. On the one hand, banks have been charging more for loans but not increasing the rewards they give to deposit holders to the same degree. This has allowed banks to have very high profit margins.
However, as the Federal Reserve slows down its interest rate hikes in 2023, investors may be concerned that banks will face more pressure to increase the rates they offer to deposit holders to keep them from leaving. If banks don't increase their rates, they may lose deposits, which is a primary form of funding for banking institutions.
Loan Default
Another concern for banks and investors is whether people will be able to pay back the loans that the banks have given out. If a recession or economic downturn occurs, it could lead to more people defaulting on their loans.
So far, banks have said that they don't expect to see many defaults until the middle of 2023, as people still have deposits that they saved during the pandemic. However, banks have also set aside billions of dollars in recent quarters to protect against potential defaults. It remains to be seen if this will be enough to cover any defaults that do occur in 2023.
Trading Stocks
Something that has been good for banks in the past, but may not be as good in 2023, is the revenue they get from trading stocks. This is because the stock market has been slowing down recently, which has hurt the profits of banks. This means that banks may not see as much profit from trading stocks in the future.
As a result, some banks may need to cut costs, including layoffs. According to one source, Goldman Sachs (NYSE: GS) may lay off as many as 3200 people in the near future.
Bank earnings due this week include JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), Citigroup, Inc. (NYSE: C), BlackRock, Inc. (NYSE: BLK), The Bank of New York Mellon Corp. (NYSE: BK), First Republic Bank (NYSE: FRC), and Saratoga Investment Corp. (NYSE: SAR).
Read our upcoming quarterly earnings review.
