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Will Banks Have Disappointing Q3 Earnings?

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Major US banks are scheduled to announce their third-quarter earnings on Tuesday. We think that lower interest rates and more competition could remain a drag on banks’ net interest margin. Notably, the Fed lowered interest rates twice this year. On September 18, the Fed announced its second rate cut by 25 basis points to a target range of 1.75%–2.25%.

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Will the rate cut impact banks?

Earlier, big banks including Citigroup (C) and JPMorgan Chase (JPM) indicated that interest rate cuts would impact their net interest income.

Previously, JPMorgan Chase lowered its 2019 net interest income outlook by $0.5 billion due to a low-interest-rate environment. Meanwhile, Citigroup stated that a rate cut by 25 basis points would have a negative impact on its quarterly revenues by $50 million. However, the bank reaffirmed its guidance. Citigroup expects its net interest income to rise by $2 billion in 2019.

Despite the Fed’s dovish stance, most large banks’ shares have recorded healthy gains this year. Citigroup and Goldman Sachs (GS) stock have risen 34.7% and 22.5% on a YTD (year-to-date) basis as of October 11. Meanwhile, JPMorgan Chase and Bank of America stocks have increased 19.0% and 17.3%, respectively. Wells Fargo (WFC) stock has risen 6.8% despite weak net interest income guidance.

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Citigroup

Analysts expect Citigroup to post revenues of $15.55 billion, which reflects growth of 0.8% YoY (year-over-year). Notably, analysts’ projection reflects a sequential deceleration in Citigroup’s top line. During the last reported quarter, Citigroup’s revenues increased by about 2%. We think that balance sheet expansion could support the top line. However, the lower interest rate could remain a drag.

Citigroup has a long history of beating analysts’ EPS expectations. The company’s bottom line has increased at a double-digit rate in the past several quarters. We think that the bank could continue to beat the EPS estimate in the third quarter. Analysts expect Citigroup to post an adjusted EPS of $1.95, which implies growth of 12.7% YoY. Improved efficiency and share buybacks will likely support Citigroup’s third-quarter EPS.

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JPMorgan Chase

Analysts expect JPMorgan Chase to post revenues of $28.49 billion in the third quarter. The estimate implies growth of 2.4% YoY, which indicates a sequential deceleration in the growth. In the second quarter, JPMorgan Chase’s top line increased 4%. Deposit balance growth and higher deposit margins supported JPMorgan Chase’s top-line growth. Also, higher lending and increased cards margins helped the bank’s net interest income.

Analysts expect JPMorgan Chase’s bottom-line growth to show a steep sequential deceleration in the growth rate. Meanwhile, analysts expect JPMorgan Chase to post an adjusted EPS of $2.45, which implies a growth rate of 4.7% YoY. In the previous quarter, JPMorgan Chase’s bottom line increased 13.1%. Share buybacks will likely support the bank’s bottom line.

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Wells Fargo

Analysts expect Wells Fargo to post revenues of $21.19 billion, which implies a decline of 3.4% YoY. The bank’s net interest income will likely fall on a YoY basis. During the last reported quarter, Wells Fargo stated that its net interest income could fall 5% in 2019. The new outlook is at the lower end of the previous guidance range of a 2%–5% decline. Higher deposit costs and lower net interest income will likely hurt the bank’s top line.

Analysts expect Wells Fargo to post an adjusted EPS of $1.14—down 1.7% YoY. The lower net interest income and investments in technology and risk management could drag Wells Fargo’s EPS down. However, share repurchases could support the bank’s third-quarter EPS.

Goldman Sachs

Analysts expect Goldman Sachs’ revenues and EPS to continue to decline in the third quarter. The bank will likely post revenues of $8.34 billion—down 3.5% YoY. Meanwhile, analysts expect Goldman Sachs to post an adjusted EPS of $4.81—down 23.4% YoY.

Goldman Sachs beat analysts’ expectations in the previous quarter. However, the bank’s revenues and EPS fell YoY.

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