The Long and Short
US banks under-promise, over-deliver on earnings
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
With all six of the US money center banks already reporting third-quarter results along with many of the largest regionals, most have landed well within the range of expectations and demonstrate stable earnings potential in the new rate environment. Spreads have been steadily moving tighter alongside the broader investment grade market since banks first began reporting, despite a steady stream of new supply from the largest issuers throughout recent weeks. And despite valuations establishing new local tights, investors remain better served to overweight the sector with limited opportunities across investment grade credit elsewhere.
Banks have attracted some extra attention this earnings season as several have warned in recent months of possible signs of weakness in net interest income for the coming year. Furthermore, concerns had been raised about credit issues potentially being worse than anticipated in key consumer categories such as auto and credit cards. So far, the larger institutions have been mostly delivering results that were well within the range of expectations and demonstrating stable earnings potential.
Over the past roughly two years, chief concerns among investors for the US banking industry have shifted as new challenges have arisen. Back in the spring of 2023, as rates were steadily rising, the industry became highly aware of large potential unrealized losses held in the banks’ held-to-maturity and available-for-sale securities holdings, as the banks had been overextending their collective appetites for duration throughout the prior period of extremely low rates. Shortly thereafter, the collapse of Silicon Valley and Signature Bank and the rescue of First Republic put emphasis on deposit stability and the risk of deposit flight. After those concerns eventually abated, the issues at New York Community Bank in early 2024 put a spotlight on commercial real estate exposures with concerns about a potential bubble among lenders. While those concerns remain, particularly for smaller lenders with larger CRE concentrations, the focus more recently has been on the Fed. Specifically, how the evolving rate environment will impact net interest income and net interest margins with highly competitive deposits weighing on profitability.
As a reminder of the backdrop coming into this earnings season, at the Barclays conference early last month, the Ally Financial CFO warned that inflation and weak employment trends were weighing on credit quality among their auto loan borrowers, and that the lender would likely be increasing provisions for credit losses. More importantly to the larger lenders, JPM warned about softening net interest income trends that could carry over into 2025, while GS stated that trading revenue might be weaker than expected. For the seven largest Category II and Category III banks, net interest income in the third quarter mostly came very close to anticipated guidance, and with only small exceptions demonstrated a significantly weaker trend over recent results (Exhibit 1). Furthermore, guidance for the remainder of the year and those that provided outlooks into 2025 did not raise any significant warnings regarding the bank’ ability to generate income in the new rate environment. JPM actually raised its full-year 2024 expectation for net interest income to $92.5 billion from prior guidance of $91.0 billion and the Street consensus of about $91.1 billion.
Exhibit 1: Recent NII results from the seven largest US banks

Source: Bloomberg, Company Filings – as reported
Concerns raised about potential credit issues being a significant issue in third-quarter earnings results has also proved overblown for the largest lenders in the industry (Exhibit 2). Provisions taken for credit costs fell largely within the range of expectations in their recently reported results. Among the largest lenders, only JPM and Citi added modestly to reserves for future losses, and even those additions were hardly a sign of material credit deterioration among borrowers. More appropriately stated, the year-over-year gains in provisions are more a sign of “credit normalization” with banks coming off extended periods of extremely low delinquencies particularly among credit card borrowers, seeing those delinquencies rise with card utilization returning to more typical long-term levels.
Exhibit 2. Recent credit provisions from the seven largest US banks

Source: Bloomberg, Company Filings – as reported
As stated earlier, IG credit spreads continue to grind tighter and tighter, with the Bloomberg broad credit index establishing a new 5-year tight earlier this week at an OAS of 80 bp. In that context, most non-financial sectors are trading at or near the lows of their five-year historical range or a 0% percentile ranking (Exhibit 3). In that context, financial sectors such as banking (22%) continue to offer the most relative value within the index and the most potential for relative outperformance for the remainder of the year.
Exhibit 3. IG Sector 5-year Percentile Ranks

Source: Santander US Capital Markets LLC, Bloomberg – Sub-sector Indices OAS results
Within the sector, bank spreads are trading in a very tight band among the largest institutions, with limited credit differentiation among issuers (Exhibit 4). Generally speaking, investors should see better opportunity among the smaller category IV banks (<$250 billion in total assets), with targeted exposures in names such as M&T Bank (MTB: Baa1/BBB+/A). However, among the category III banks the additional spread available in Truist Financial (TFC: Baa1/A-/A-) over peers USB and PNC financial presents a good relative value opportunity for investors targeting the higher rated issuers.
Exhibit 4: Big US banks credit curve

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
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