Here's the agenda for banks this earnings season

January 10, 2025 6:00 AM

As banks prepare to report their quarterly earnings, analysts see plenty of reasons for optimism.

President-elect Donald Trump is expected to usher in a new era of looser regulations and deconstruct Biden administration policies that bankers loathed. Interest rates are also expected to come down further in 2025, giving banks a breather on their deposit costs and alleviating strains among borrowers pinched by high interest rates. Loan growth may finally accelerate.

There are also risks ahead. The tepid growth in banks' loan portfolios may persist — or worsen if the economy takes a nasty turn. A renewal of trade spats may hamper investment all while pushing up prices for consumers, dashing hopes of lower rates. Some borrowers who are already under pressure may end up defaulting, prompting banks to take losses.

"The themes certainly sound good for banks for the year," UBS analyst Erika Najarian wrote in a note to clients.

But she cautioned that "we've been down this road before," and some banks may fare better than others. The biggest winners will be those with strong deposit franchises, since they'll reap savings by lowering the interest they pay to depositors.

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Najarian is eyeing Bank of America, Wells Fargo, Pittsburgh-based PNC Financial Services and Columbus, Ohio-based Huntington Bancshares as best-positioned for the year.

Brett Rabatin, who covers midsize banks at Hovde Group, notes that inflation and the macroeconomic landscape remain uncertain. But he's similarly optimistic about the industry, partly due to lower deposit costs easing the pressure on banks' net interest income.

"The bottom line is our view is very bullish overall due to outlooks for strong [net interest income] expansion, fairly stable interest rates, a backlog of M&A, a likely more palatable regulatory backdrop, and reasonable credit trends," Rabatin wrote.

Below are some key issues to watch as banks give their 2025 outlooks.

Michael Barr, the Federal Reserve's vice chair of supervision, plans to step down from the role while remaining on the Board of Governors.

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Regulatory expectations

Banks' upcoming performance updates mark the final chapter of operations under the Biden administration. A few days after big banks begin reporting earnings, Trump will be sworn into his second term in office.

Republicans' sweep of Washington — about five weeks into the fourth quarter — gave bank stocks an immediate boost, in part due to a resolution of lingering uncertainty on the regulatory front, though that market enthusiasm has cooled somewhat in recent weeks.

Bankers and industry experts have also been optimistic since the election, predicting stronger investment banking returns and a rebound in bank mergers, plus the likely scrapping of some Biden administration policies.

That includes rules slashing credit card late fees to $8 and the proposed Basel III endgame, a much-maligned effort to raise capital requirements for the largest banks. The various iterations of the rule, which would have imposed a capital increase of 19% at some companies in its initial iteration, had industry participants preparing for a legal battle.

But this week, rule's champion Fed Vice Chair for Supervision Michael Barr announced he would step down as the agency's top regulator. Analysts say with the incoming administration and Barr's departure, the threat of Basel III has subsided, giving large and regional banks more wiggle room to buy back shares.

"The potential for a further watered-down Basel III endgame is a strong positive catalyst," analysts at Keefe, Bruyette & Woods wrote in a note to clients this month, pointing to megabanks such as JPMorgan Chase and Bank of America as major beneficiaries.

Analysts are also optimistic about what's likely to be an easier glide path for banks to merge. Though the regulatory environment hasn't been the only constraint to M&A, bankers have repeatedly said the regulatory process to combine has gotten harder and taken longer.

Jon Arfstrom, an analyst at RBC Capital Markets, said he expects Trump administration regulators to undertake a "less combative approval process."

The administration's views on larger mergers remain uncertain. But M&A conversations are likely to tick up as midsize banks look for ways to cross significantly north of the $100 billion-asset mark, where regulators start applying tougher rules to banks.

"Overall, we remain optimistic on the 2025 earnings potential for our universe of coverage given the favorable macro and likely improving regulatory picture," Arfstrom wrote. "We believe this all can translate into stronger growth, stable to rising margins, positive operating leverage, manageable credit, and increased capital flexibility, including an increase in M&A over time."

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Investment banking

Big banks continued to ride the investment banking comeback that boosted earnings in 2024 through the fourth quarter. After the rapid rise in interest rates stymied capital markets business, a pent-up appetite for raising capital helped boost income for giants like JPMorgan Chase, Wells Fargo and Bank of America.

"We prefer money center banks into 4Q earnings as they are more likely to have earnings upside from strong investment banking," Vivek Juneja, an analyst at JPMorgan, wrote in a Tuesday note. "Versus some of our regionals, which may see investment banking fees down quarter-over-quarter and would benefit from more rate cuts."

He added that equity markets have been "euphoric" since the election in the hopes of regulatory and revenue benefits.

Investment banking fees were up 25% from the prior year, led by equity underwriting, per Dealogic. In 2024, initial public offerings sprang back to life after a comatose 2023 and 2022, with issuance up 63% year over year.

Gerard Cassidy, an analyst at RBC Capital Markets, wrote in a note Wednesday that the quick surge in interest rates was the main hamstring to investment banking activity in recent years, but as inflation has cooled, so too has some of the pressure on the Fed's monetary policy.

"Recent company commentary has called out healthy pipelines and green shoots in capital markets activity," Cassidy added.

UBS' Najarian wrote that a "capital markets renaissance" would benefit the megabanks, highlighting Citi, Wells Fargo and Bank of America as potential winners.

They may spring even further if Trump's appointees to the Department of Justice and Federal Trade Commission become more permissive. Under Biden, both agencies have led the charge against mergers in a variety of industries. New Trump administration leaders may be more permissive, even if they continue to keep the pressure up on the tech sector.

Bill Demchak, chairman and CEO of PNC Financial Services, said at a December conference that "sentiment amongst corporations" was positive.

"The talk of M&A coming back, the talk of investments, some degree of certainty as [to] what they're going to face on regulation is causing a little bit of amped up energy — if you want to call it that — inside of corporate America that we hope will play out next year," Demchak said at the time.

Loan growth

If M&A rebounds, business and consumer lending activity could also finally tick up, giving banks more opportunities to reel in interest income.

The industry saw meager loan growth last year, as high interest rates and uncertainty about the election seemed to dampen appetite for big corporate investments. Even the one stalwart driver of loan growth — consumer credit cards — showed signs of faltering as 2024 came to a close.

In recent weeks, bankers haven't pointed to an imminent turnaround, but analysts will be on the lookout for any commentary pointing to a resurgence later in the year.

"Intra-quarter updates suggest some lingering sluggishness in lending activity, but we believe improved borrower sentiment on the economy should eventually support higher volumes," wrote Arfstrom, of RBC Capital Markets.

Some borrowers are still waiting "on the sidelines for rates to come down from breakneck levels," Brian Foran, a bank analyst at Truist Securities, wrote in a Monday note. And some lenders have also been hunkering down, particularly by avoiding more loans in commercial real estate.

"There just isn't a lot of growth to go around right now," Foran wrote. "And while growth may improve modestly from cyclical lows, it is unlikely to come roaring back."

In lieu of stronger loan activity, banks may opt to use some of their excess capital for M&A or to buy back their shares, Foran wrote.

Another plus: Reduced loan demand means banks don't need to compete as heavily for deposits, enabling them to cut their deposit costs and pad profits.

Credit quality

The good news is that, at least for now, bank borrowers aren't showing huge signs of trouble repaying their loans and thus are keeping lenders' portfolios fairly clean.

Banks with major CRE exposures are likely to build more reserves against loan losses as high interest rates continue to strain real estate properties, Foran wrote. Some banks are also upping their loan loss reserves to guard against hurricanes, he noted, which represents another damper to profits.

But overall, bank CEOs haven't expressed alarms in recent weeks.

"The intra-quarter updates have been very consistent and support our view that metrics are likely to be relatively stable, with manageable levels of losses," Foran wrote.

After much handwringing the last two years, investors appear to be less concerned about banks' loan portfolios, RBC's Arfstrom wrote. Though credit will likely remain "quite manageable," that doesn't mean banks won't set aside more reserves as some borrowers run into trouble.

Office buildings and multifamily buildings may continue facing pressure, but CRE issues will likely "move slowly through the system and have been or will be identified well in advance," Arfstrom wrote.

That gradual approach will also help give the industry more time to extend loans for borrowers with temporary cash crunches or find other solutions, he wrote.

Auto lending may be a countervailing trend, Arfstrom added. Analysts are watching whether Ally Financial, a major auto lender, will report better trends in its portfolio after an uptick in loan defaults prompted some investors to sell the stock.

Credit card loans have fared a bit better. While charge-offs did rise past pre-COVID levels, the worsening in loan quality has stabilized in recent months.

"While there is clearly stress at lower income households, U.S. consumers remain mostly resilient but are being more cautious following the cumulative effects of higher interest rates and inflation," Yanni Koulouriotis, vice president of North America financial institutions ratings at Morningstar DBRS, said in a news release Wednesday.