Big banks beating Q2 estimates, but will credit worries sink sector

Big banks beating Q2 estimates, but will credit worries sink sector
Financials take center stage on Wall Street this week as they report second quarter earnings.
JUL 16, 2024

It’s an introspective week on Wall Street as a slew of banks and brokers report their second quarter earnings. Financial advisors, of course, are taking note as well, deciding whether they want to be buyers or sellers of some of their competitors shares.

Among the financial giants that have reported results so far, Morgan Stanley (Ticker: MS) posted $3.08 billion in net income for the quarter on $15.02 billion in revenue today, beating analysts’ expectations. Earnings per share at the investment bank came in at $1.82, led by investment-banking fees which soared 51 percent from a year earlier. 

Morgan Stanley’s wealth unit fell short of Street expectations with $6.79 billion in revenue for the quarter. Net new assets in that business totaled $36.4 billion, short of the pace needed for the bank to reach its annual target, while net interest income slumped.

Morgan Stanley’s earnings report followed on the heels of rival Goldman Sachs’ (Ticker: GS) impressive second quarter results. Goldman posted earnings yesterday that were 2.5 times higher than a year ago, also trumping analysts’ forecasts. Goldman said its net income was $3.04 billion on $12.7 billion in revenue in the three months through June 30.

Elsewhere, Charles Schwab (Ticker: SCHW) reported $1.33 billion in net income for the three-month period, beating a $1.23 billion average of analyst estimates. Earnings per share for the quarter were 66 cents, also exceeding Wall Street expectations.

Schwab said new brokerage accounts in the quarter rose to 985,000. Nevertheless, while that number is up from 960,000 in the same period a year earlier, it’s less than the 1.04 million analysts were expecting. 

As a result, Schwab’s shares sank 9 percent in midday trading on Tuesday. The stock had risen 9.1% this year through the close of trading on Monday.

Despite the rash of earnings beats by the banks this quarter, Tom Graff, chief investment officer at Facet, is staying neutral on the sector.

“I think there's some signs of green shoots in deal making, which would benefit the investment banks through fees but also could encourage more loan activity, which would be good for all banks,” said Graff. “However, we think credit worries will continue to weigh on the sector. Right now consumer delinquencies are well below historic norms, and if they just rise to pre-COVID averages, that would be a material impact on bank profits.”

Graff adds that commercial real estate also remains a major threat for regional banks. And there is a chance that Fed rate cuts could help with net interest margins, but he believes that "won't be obvious in this quarter's earnings reports."

Kicking off the earnings parade, shares of Wells Fargo (Ticker: WFC) sold off last Friday after the lender’s second-quarter results were marred by higher-than-expected costs. Wells Fargo saw its net income for the period drop to $4.9 billion, or $1.33 a share, yet it still beat the $1.29 average of analysts’ estimates.

JPMorgan’s (Ticker: JPM) also saw higher expenses ding its quarterly results. Net interest income came in at $22.7 billion for the quarter, up 4% but slightly below estimates. 

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