The official fourth quarter earnings season starts today with Alcoa, Inc. (NYSE: AA) set to report its financial numbers after the market.
Let's see how the results large-cap banks could fare for the October-December period.
Net interest margins (NIMs) are likely to remain under pressure in the fourth quarter, reflecting the ongoing low rate environment and pressure on asset yields. This quarter saw some increase in medium-/long-term rates as average 10-year Treasury rates were up 7 basis points (bps) sequentially.
"Of the 17 banks we track, we expect NIM declines at all but four. However, we will likely need to see rates rise by ~50bps to see NIMs stabilize," Deutsche Bank analyst Matt O'Connor wrote in a note to clients.
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While banks continue to reduce funding costs, these efforts are unlikely to be enough to offset lower asset yields. Loan yields are coming under more pressure as more banks focus on loan growth, but pricing remains mostly rational and industry yields remain above historical averages.
Bank of America Corp. (NYSE: BAC), KeyCorp (NYSE: KEY) and Wells Fargo & Co. (NYSE: WFC) would see an increase in the NIM while net interest margins of BB&T Corp. (NYSE: BBT), Fifth Third Bancorp (NASDAQ: FITB) and Comerica, Inc. (NYSE: CMA) could decline in the fourth quarter.
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Fed data shows that average total loans are up just 1 percent quarter-over-quarter (q/q) un-annualized with period-end balances up 0.6 percent q/q. Loan growth reflects growth in commercial and industrial and all other loans and to a lesser extent residential mortgage, partially offset by declines in home equity and credit card.
Meanwhile, mortgage pipeline likely weakened a bit. However, the fourth quarter mortgage originations are likely to be about in line with the third quarter levels.
"Underlying mortgage revenues will likely be flattish vs. 3Q with continued strong mortgage margins and volume," O'Connor noted.
Banks with more meaningful mortgage exposure include Bank of America, BB&T Corp., Fifth Third, JPMorgan Chase & Co. (NYSE: JPM), Regions Financial Corp. (NYSE: RF), SunTrust Banks, Inc. (NYSE: STI), U.S. Bancorp (NYSE: USB) and Wells Fargo.
Expectations for capital markets revenues seem to have come down into the quarter as weaker seasonality were compounded with concerns over the Fiscal Cliff, the slow US recovery, and slowing global growth.
"Capital markets revenues (ex CVA/DVA) likely down q/q, but stronger vs. a year ago. We estimate trading revenues (ex-CVA/DVA) could be down 10-15% q/q on average, but up from weak year ago levels," O'Connor said.
Fixed Income Currency and Commodities (FICC) trading could be meaningfully stronger versus last year, but down from the third quarter. Lower q/q FICC trading will likely be driven by lower trading activity and less spread tightening across most products.
The highest year-over-year increases in FICC trading revenues should come from Citigroup, Inc. (NYSE: C), Bank of America and The Goldman Sachs Group, Inc. (NYSE: GS).
"Vs. 3Q, however, FICC trading will likely be down 10-15% on average. Morgan Stanley (NYSE: MS) is likely to be negatively impacted by Hurricane Sandy in its commodities business," the analyst wrote.
In addition, equity trading may be likely weaker in the fourth quarter on lower volumes while investment banking fees could be better than expected. Continued improvement in credit trends could be witnessed in the fourth quarter results but at a slower pace.
"We expect non-performing assets (NPAs) to continue to decline, reflecting a continued slowdown in the pace of nonaccrual inflows. While loan loss reserve drawdowns are likely to continue at most banks, drawdowns should continue to slow," O'Connor said.
Meanwhile, Basel 3 capital ratio is expected to improve in the fourth quarter, given earnings and mitigation of risk weighted assets. The highest increases should come from M&T Bank Corp. (NYSE: MTB) and PNC Financial Services Group Inc. (NYSE: PNC).
"We expect higher Basel 3 Tier 1 common at 13 of the 17 banks. We see the largest increases in B3 Tier 1 common at MTB (to 6.4% vs. 5.9% at 9/30), PNC (to 7.5% vs. 7.2%), RF (to 9% vs. 8.6%), and STI (to 8.3% vs. 7.9%)," O'Connor added.