Chan pointed out that this trend is unlikely to reverse quickly
Major U. S. banks are entering the third-quarter earnings season with solid credit quality but face mounting pressure from higher interest rates, declining investment banking revenue, and emerging risks tied to commercial real estate exposure, according to Bloomberg Intelligence analyst Herman Chan. Chan told Bloomberg This Weekend that while loan loss reserves remain manageable and consumer lending shows resilience, the broader profitability outlook is clouded by weakening deal flow in capital markets and uncertainty over how long elevated rates will persist. He noted that JPMorgan Chase, Bank of America, and Citigroup are particularly exposed to shifts in trading and advisory income, which have historically contributed significantly to quarterly results. Pressure Mounts on Investment Banking Revenue Investment banking fees have declined for several consecutive quarters as companies delay IPOs and mergers amid economic hesitation.
Chan pointed out that this trend is unlikely to reverse quickly, especially with geopolitical tensions and volatile markets dampening corporate confidence. He added that banks may need to rely more on trading and net interest income to offset the shortfall, though rising funding costs could squeeze margins even there. How Will Higher Rates Affect Loan Performance? While higher rates have boosted net interest income so far, Chan warned that the lagged effect on borrowers could surface in the coming months. He emphasized that sectors like office real estate and leveraged loans are showing early signs of stress, which could lead to increased provisions if economic growth slows further. Still, he said most large banks have strengthened their balance sheets since the 2023 regional bank turmoil, giving them a buffer against moderate downturns. Frequently Asked Questions What are the main risks facing banks in Q3 earnings?
The primary risks include declining investment banking activity, potential credit deterioration in commercial real estate, and the sustainability of net interest income gains as funding costs rise alongside loan yields. How strong is credit quality among major banks today? Credit quality remains relatively strong, with low delinquency rates and robust capital ratios, though analysts are monitoring specific sectors like office property and leveraged finance for early warning signs. Could banks cut dividends or buybacks if profits fall? While possible, Chan noted that large banks typically prioritize maintaining shareholder returns unless faced with severe capital strain, which he does not currently anticipate for the largest institutions.