Q2 bank earnings seen benefiting from capital markets, volatile trading

Banks are expected to see a boost in Q2 earnings due to a resurgence in capital markets and strong equities trading, with major players like JPMorgan Chase and Citigroup set to report results soon.

Analyst predictions indicate significant year-over-year increases in equity capital markets volume and global M&A activity, as investment banking revenues are anticipated to exceed expectations due to strengthening pipelines.

While banks are projected to experience moderate growth in net interest income and increased fee income, concerns remain regarding the slowdown in credit card loan growth and potential higher expenses for some institutions.

Specific guidance from banks shows optimism for NII growth, with JPMorgan and PNC Financial predicting positive trends, while regional banks are highlighted for their potential upside in long-term earnings.

Earnings Forecast for Banks in Q2: A Positive Outlook

Banks are anticipated to experience a boost in earnings for the second quarter of the year, driven by a resurgence in capital markets and robust equities trading. This favorable environment is largely attributed to market volatility stemming from tariffs. The earnings season will commence on Tuesday, featuring major players such as JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo, State Street (STT), and BNY Mellon (BK).

Analyst Betsy Graseck from Morgan Stanley highlighted that North America's equity capital markets volume recorded a significant increase of 49% year-over-year (Y/Y) by June 30. This is a recovery from a low of -33% Y/Y on April 24. Additionally, global announced mergers and acquisitions (M&A) volume rose by 30% compared to the previous year, overcoming an earlier decline of -22% Y/Y noted on May 1.

Graseck expressed optimism in a client note, stating, "We anticipate that 2Q25 investment banking revenues will exceed expectations, as management teams point to strengthening pipelines." Regarding trading, she predicts a 10% Y/Y increase in Q2 equities market revenue.

During investor day at JPMorgan Chase in May, Co-CEO Troy Rohrbaugh of the Commercial & Investment Bank indicated that investment banking fees have decreased in the mid-teens compared to a year ago, while market fees have experienced a mid-to-high single-digit increase Y/Y in Q2.

Analyst Vivek Juneja from J.P. Morgan expects banks' Q2 results to show moderate growth in net interest income (NII) ranging from 2% to 3.5% quarter-over-quarter (Q/Q), alongside steady growth in commercial and industrial loans. However, a slowdown in credit card loan growth is anticipated, along with an increase in fee income driven by market-related revenue, controlled expenses, and stable credit quality.

Truist Securities analyst John McDonald noted that mid-quarter updates indicate positive trends for NII, tied to improving loan growth that sets the stage for better performance in the second half of the year. Although deposit growth appears less promising amid concerns regarding seasonality and competition, fee streams should benefit from lower investment banking activity and stronger trading due to favorable volatility dynamics.

Citigroup's executive, Vis Raghavan, projected a single-digit increase in banking fees for Q2, with market segments likely rising in mid-to-high single digits, suggesting room for further improvement.

McDonald pointed out that investor sentiment seems to be the weakest for Wells Fargo (NYSE:WFC) among the Global Systemically Important Banks (GSIBs) and for U.S. Bancorp (USB) in the super-regional category.

Revised guidance anticipates positive NII growth for JPMorgan and PNC Financial, though the latter may experience offsetting factors, particularly concerning a decrease in fee outlook, as McDonald observed. There are emerging concerns about higher expense guidance provided by Bank of America (NYSE:BAC) and Citigroup, though investors are not expected to adjust their forecasts significantly.

Among the U.S. mega-banks, Keith Horowitz from Citi noted a decline in credit concerns. He believes that stock performance will closely reflect expectations regarding net interest income. He considers Wells Fargo well-positioned to deliver positive surprises.

Graseck identified Goldman Sachs (NYSE:GS) and JPMorgan as the preferred stocks leading into earnings season. For Goldman, she anticipates an increase in investment banking revenue, asset and wealth management income, and equities market performance. For JPMorgan, expectations include higher fee income, reduced provisions, increased NII, a smaller share count, and lower expenses.

Horowitz underscored a focus on regional banks, where he sees the most significant upside potential, suggesting faster tangible book value (TBV) growth and improved returns from securities and swap books. His top recommendations in the banking sector include Ally Financial (ALLY), Citizens Financial Group (CFG), and Truist Financial (TFC), arguing that their long-term earnings potential remains undervalued despite generally favorable risk indicators.

For Q2 preparations, key guidance issued by banks includes:

• JPMorgan Chase (JPM): Projected 2025 net interest income, excluding markets, around $90 billion; including markets, approximately $94.5 billion. CFO Jeremy Barnum indicated that NII, excluding markets, may exceed estimates by about $1 billion.

• Wells Fargo (WFC): Expected 2025 net interest income growth of 1%-3% Y/Y, implying figures of $47.7 billion to $47.9 billion.

• Citigroup (C): Anticipating a 2%-3% growth in 2025 net interest income, excluding markets, with total revenue expected between $83.1 billion and $84.1 billion.

• Bank of America (BAC): A projected Q4 2025 NII (FTE) of $15.5 billion to $15.7 billion, up from $14.6 billion in Q1.

The upcoming earnings reports promise to provide valuable insights into the state of the banking sector as it navigates evolving market conditions.