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U.S. bank earnings likely to signal tough year ahead

A sign outside the headquarters of JPMorgan Chase & Co. in New York in 2013. U.S. banks are expected to open 2014 with flat profits.

Mike Segar/Reuters

A smorgasbord of U.S. bank earnings is due this week, though investors may find it a meagre feast.

The buffet begins on Tuesday, when JPMorgan Chase & Co. and Wells Fargo & Co. report their results for the last quarter of 2013. The following three days will supply updates from Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley.

Analysts anticipate that the results will show that conditions for banks remained challenging through the end of last year. Fifteen of the 19 largest U.S. banks are expected to report a decrease in profit from the prior quarter, according to an analysis of average estimates by SNL Financial, while a majority of such banks are also expected to report lower revenues.

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Compared to the same quarter a year earlier, profit at large banks is likely to have remained flat, Gerard Cassidy of RBC Capital Markets wrote in a note on Friday.

The causes of the anemic performance are multiple. Mortgage lending has slowed sharply, legal and regulatory costs are climbing, revenue from capital markets is sluggish, pressure on loan margins remains high and provisions for bad loans are set to creep up after recent declines.

"The banking environment remains challenging in terms of the revenue and loan growth outlook," Moshe Orenbuch, an analyst at Credit Suisse, wrote in a note to clients last week. "However, banks continue to make progress on controlling expenses and improving capital – which will be critical drivers in 2014."

Analysts see the potential for better times ahead, particularly if the U.S. economy grinds into higher gear, raising demand for loans and pushing up interest rates, which will ease pressure on margins.

"While earnings will be weak, our sense is the industry's outlook will prove more upbeat," analysts Todd Hagerman and Robert Greene of Stern Agee & Leach wrote in a report on the upcoming bank earnings season.

Analysts caution that the fourth quarter isn't the best one for gauging overall performance, since banks tend to use it as a receptacle for items they need to get rid of – a kind of "kitchen sink" of financial reporting.

One type of cost that could feature prominently is that of legal settlements. Large U.S. banks continue to work through lawsuits and regulatory tangles connected to the 2008 financial crisis and some appear eager to resolve such problems with dispatch.

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Meanwhile, the belt-tightening will persist. "A continued focus on lowering of operating expenses is the industry's watch word," wrote Mr. Cassidy of RBC, who anticipates hearing "more about branch closings and personnel reductions in the upcoming year."

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