As of late June, investors built in a 65% chance of a 25-basis-point Fed rate cut by the Federal Open Market Committee’s (FOMC) September meeting, according to the CME FedWatch Tool. Odds are about the same that the Fed will follow up with another cut later in the year. Interest rates remain at two-decade highs with the Fed’s target range set at 5.25% to 5.5% since last July.
Big banks’ ability to surprise could depend on whether they manage to keep up the strong trading and investment banking results seen in Q1. That quarter featured Goldman Sachs, JPMorgan Chase, and Morgan Stanley reporting solid numbers in those categories, while all six of the country’s largest banks topped analysts’ earnings and revenue expectations. Those six include the three mentioned above as well as Citigroup, Bank of America, and Wells Fargo, all of which report Q2 results in the coming days.
Investment and trading revenue is only part of the equation, however. NII, which swelled for many banks over the last year as interest rates rose, also likely needs to keep providing a boost. As noted above, that’s in question.
Last quarter, JPMorgan Chase’s guidance raised concerns about future NII. NII declined 4% sequentially in Q1 to $23.2 billion, and in its press release, JPM cited “deposit margin compression.” This means a narrowing gap between what it makes in interest and what it pays out. It added it expects “normalization to continue for both NII and credit costs.” The company guided for $90 billion in 2024 NII, stable with its previous estimate and disappointing investors who’d expected a rise. Normalization, in this case, would not be a good thing, necessarily, considering how much JPM and other big banks benefitted from last year’s lofty NII.
While JPM is just one company, its massive market capitalization of more than $570 billion as of late June gives it broad influence across the sector, meaning its quarterly results can influence the path of the entire financials sector. If JPM struggles with NII, it’s possible other large banks might too. NII fell sequentially at Citigroup in Q1, and the company guided for lower full-year NII excluding its market segment. NII also fell at Bank of America in Q1.
