Bank Earnings Fuel Optimism, Caution

As large U.S. banks report their third-quarter earnings for 2024, financial markets have responded with optimism, pushing the S&P 500 and Dow to record highs. Stronger-than-expected earnings have rekindled hopes of a “soft landing” for the economy, though some analysts argue that a “no landing” scenario—which we discussed last week—may still be in play. This unexpected strength has left investors recalibrating expectations about the Federal Reserve’s rate strategy and the resilience of U.S. banks. 

After an initial surge following the earnings reports, markets remained steady into this week. However, beneath the surface, the reports reveal mixed signals about the economy. While falling deposit costs provide relief to banks, uncertainties around credit risks and the future path of interest rates linger. These earnings offer a window into broader economic trends as the banking sector continues to weather a volatile environment. 

Some key takeaways: 

Deposit costs are easing. After months of intense competition, banks are finally seeing some relief on deposit costs following the Fed’s September rate cut. “We believe we are close to the trough,” said one bank executive, referencing the stabilization in deposit costs as fewer customers switch to higher-paying options. Although net interest income has been under pressure due to higher rates in the first half of the year, this recent trend signals banks may soon benefit from lower funding costs. 

Credit quality shows signs of stabilization, but risks remain. Banks are still preparing for credit risks, especially in commercial real estate and consumer loans. While some banks reported an uptick in credit card charge-offs, overall credit quality is seen as less of a worry compared to previous quarters. According to one CEO, “The benefits of inflation slowing and interest rates starting to ease should be helpful to all customers, but especially those on the lower end of the income scale.” Another bank representative characterized recent credit trends as a “normalization,” with credit losses moving toward more typical pre-pandemic levels. 

Capital markets business provides a bright spot. Despite headwinds in loan growth and fee income, the capital markets division has proven to be a strong performer for many banks this quarter. Trading revenues and investment banking fees have exceeded expectations, driven by resilient market activity. One securities analyst noted, “Markets remain strong and optimistic, which is driving solid investment banking fees, the brightest spot for bank revenues.” 

Banks expect mixed results for the fourth quarter and beyond. As banks continue to navigate an uncertain economic environment, their guidance for Q4 2024 and 2025 will be closely watched. Analysts expect banks to offer a cautiously optimistic outlook, with further rate cuts from the Fed potentially boosting loan growth in 2025. However, some uncertainty remains, namely in the areas of consumer spending and credit risk. “We will look to see if the evolving interest rate backdrop alters company views,” said one industry expert.