KBW's Michaud Explains What to Expect from a Pressured Q3 Bank Earnings Season

KBW CEO Predicts Bank Earnings Season Amid Rate Pressures

Overview of Q3 Bank Earnings Season

Banks face pressure until the rate outlook settles, according to Keefe, Bruyette & Woods (KBW) CEO Tom Michaud. The recent selloff in bank stocks is attributed to rate nerves, not weakening fundamentals. Big-bank earnings begin next week, with JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo reporting on October 13.

AI Analysis of Earnings Transcripts

KBW used artificial intelligence to scan second-quarter earnings transcripts. Mentions of net interest margin, the gap between loan income and deposit costs, ran 60% above the prior three-year average. A regression analysis found that forecast changes in that margin correlated most closely with bank stock performance. Michaud personally considers the rate worries overdone.

Outlook for Bank Investment Banking Profits

Michaud expects third-quarter investment banking profits to rise about 10% year over year, helped by a private equity backlog. The industry still feels like business is good, according to Michaud. He also notes that insider buying in financials has thinned, with the number of executives purchasing shares near a 23-year low.

Bond Market Concerns and Buybacks

Michaud added that KBW's trading desk is hearing renewed concern about bond markets and interest rates. Unrealized bond losses equaled 19% of industry tangible capital, or equity minus goodwill, in 2023. Last quarter, they were 5%. Those marks may slow buybacks at some banks. The largest banks have already optimized capital. In contrast, regional banks hold more excess and need not slow down. KBW modeled 200 banks through 2028. It projects tangible common equity, a core capital cushion, near 10% by then, versus 6.5% before the global financial crisis.

Credit and Systemic Risks

Michaud expects one-off credit problems after years of near-zero credit costs. The question is whether they turn systemic. Return on tangible capital, KBW's best long-term fit for bank valuations, is improving and sits in the high teens.