How To Study Big Bank Results This Earnings Season

By: James Flippin · October 14, 2022 · Reading Time: 3 minutes

Hunting for Clues

At the onset of any earnings season, there are macroeconomic trends at play that impact what investors are focused on. At present, the most pressing factor is persistent inflation, with the follow-up question being how companies within various sectors are responding to that pressure. Going further, Wall Street hopes to gain insight as to which direction the Fed may take in its ongoing rate hike campaign.

In this sense, the third-quarter earnings data being shared by institutions such as JPMorgan Chase (JPM), Citigroup (C), Morgan Stanely (MS), and Wells Fargo (WFC) are illustrative in many ways. Plus, the CEOs of all these firms are poised to answer questions from analysts, investors, and members of the media. Taken as a whole, the market gets a snapshot view of the banking sector, how rising rates are impacting the economy as a whole, and what some of the world’s most influential financial minds think about present conditions.

Rising Rates, Falling Demand

The current macroeconomic environment presents a sort of mixed bag for banks and lending institutions. While higher interest rates means they can charge more for loans, they also push down demand on behalf of consumers. Data analysis firm Refinitiv (LNSTY) conducted a survey in which experts predicted JP Morgan Chase, Wells Fargo, Morgan Stanley, and Citigroup to experience falling profits as a result of higher rates.

Continuing with data connected to loans and their significance, investors will be watching for how many new loans are being taken on. If individual loan growth is declining, that’s a fairly direct indication that rising rates are making an impact. Concepts such as credit risk and loan loss also come into play in a challenging economic environment, but most Wall Street watchers don’t peg either as major areas of focus during this earnings season.

What To Watch For

When listening in on earnings calls or reading transcripts, it’s likely the concept of capital adequacy will be discussed. Thinking back to the 2008 financial crisis, investors will recall the collapse of Lehman Brothers, when defaulting subprime loans led the major firm to declare bankruptcy.

Now, with the UK’s bond market in turmoil and Swiss investment bank Credit Suisse (CS) reportedly experiencing trouble, analysts will want to know where major US banks stand in terms of liquidity. While the Dodd-Frank Act of 2010 put more strict rules in place, some are worried about how US institutions are exposed to European banks.

Finally, but potentially most importantly, all of the major banks’ earning calls will feature commentary from executives as to where they see the economy headed in the coming months and years. These statements of opinion often have a major impact on the market and knowing the context could help your confidence as an investor.

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