Inflation remains elevated pushing out futures expectations for further interest rate cuts in 2025 to just a -1/4 point cut in June. Early bank reporting trends reveal approximately 75% of banks beating quarterly EPS estimates with generally cautious first half 2025 outlooks followed by back half pick up.
BLS reported the December Consumer Price Index (January 15) increased a headline 0.4%. The core CPI in December increased 0.2% breaking the 5-month trend of 0.3% monthly increases. Still the 6-month annualized core CPI rate increase to 3.2% as the June comparison was lapped. Prospectively, the 6-month annualized rate would increase to 3.5% if January core CPI returned to 0.3% while it would hold flat with a monthly increase of 0.2%. Regardless, consumer inflation trends remain elevated substantially above the Fed’s 2% long term policy goal. A 3.2% inflation rate equates to the dollar devalued by half every 22 years.
In banks a half week of early 4Q24 reports showed the expected favorable trends with ¾ of banks topping consensus EPS estimates by a median 7.5%. Sequential quarter EPS comparisons so far have just a 0.32% median EPS increase from September. The money center banks benefited from robust investment banking and capital markets activity in the quarter which weights the early averages towards those exposures.
A head wind to EPS growth is higher non-interest expense as JPM CFO Jeremy Barnum noted, “while we haven’t explicitly called it out on each bar, inflation remains a source of some upward pressure. And as always, we are generating efficiencies to help offset it.”
JPM CEO Jamie Dimon answered a call question regarding credit quality by commenting, “the biggest driver of credit has been, and always will be, unemployment. That’s both on the consumer side, and it bleeds into the corporate side. It bleeds into mortgages, subprime, credit card. So really, it’s your forecast of unemployment, which you have to make your own, which will determine that over time. And so the second thing, you said vulnerabilities, it’s unemployment, but the worst case would be stagflation. Higher rates with higher unemployment will drive higher credit losses literally across the board. I’m not — we’re not predicting that, but you just asked where are those vulnerabilities. That’s the vulnerabilities.”
Finally, Barnum commented on post-election sentiment shift noting, “given the significant improvement in business sentiment and the general optimism out there, you might have expected to see some pickup in loan growth. We are not really seeing that. I don’t particularly think that’s a negative. I think it’s probably explained by a combination of wide open capital markets, and so many of the larger corporates are accessing the capital markets, and healthy balance sheets in small businesses and maybe some residual caution.”
MTB CFO Daryl Bible also commented on the uncertainty regarding 2025 loan growth expectations noting, “it’s fluid right now whether we’re going to have strong loan growth in ’25 or something maybe not as strong.” Bible also noted the rate window in 2024 that allowed for material resolution in a segment of the bank’s criticized portfolio, “the yield curve really dropped in August, September time frame, and we were able to get a lot of placements with a lot of our customers for our RCC business. So the highest percentage of reduction in our criticized balances was basically full payoffs. The next largest hike was upgrades. So we still have a lot of businesses still curing and getting better. We talked about it in the prepared remarks. Some of the COVID industries that were impacted now have much stronger P&Ls, and that’s impacting. And then finally, we did have some partial paydowns and some charge-offs. But the biggest driver was the yield curve.”
BAC CFO Alastair Borthwick commented positively on funding trends noting, “the biggest story in consumer this quarter is deposits because these are the most valuable deposits in the franchise. And in the last 6 months, we believe we’ve seen the floor begin to form after several periods of slowing decline. Consumer Banking deposits appear to have bottomed in mid-August at around $928 billion and ended the year at $952 billion on an ending basis. Looking at averages, you can see then the deposits grew $4 billion from the third quarter to $942 billion, all while our rate paid declined to 64 basis points.”
SNV CEO Kevin Blair similarly commented, “as we look to the first half of 2025, we expect the margin to be in the mid-320s which is relatively stable, exclusive of the nonrecurring fourth quarter items. Our guidance assumes a modestly consistent pace of NIM expansion in the second half of 2025 on continued fixed rate asset repricing and a more steady rate environment. Our sensitivity profile remains relatively neutral to the front end of the curve, and we remain slightly asset sensitive to longer-term rates.”
Blair also noted the impact from the bank’s slight asset sensitivity, “during an easing cycle, the margin will still exhibit short-term pressure due to the timing lag between loan and deposit repricing. We continue to produce solid consistent growth in noninterest revenue driven by key areas such as Treasury Management, Capital Markets, Wealth Services and Commercial Sponsorship.”