US bank profits to rise on stronger trading, investment banking

Major U.S. banks are poised to report stronger second-quarter profits, driven by buoyant trading and a modest rebound in investment banking activity, with analysts anticipating low-to-mid single-digit gains in net interest income and reduced loan loss provisions. Investors will scrutinize forward-looking statements regarding loan growth sustainability and plans for deploying excess capital, as firms like JPMorgan Chase, Citigroup, and Wells Fargo prepare to release earnings amidst ongoing economic uncertainty.

Analysis

Major U.S. banks are positioned for a strong second-quarter earnings season, with consensus pointing to beats on expectations driven by two primary factors: buoyant trading revenues and a rebound in investment banking. Executives at Bank of America and Citigroup previously guided for mid-to-high single-digit percentage growth in markets revenue, a trend expected to persist amid ongoing macroeconomic uncertainty. Investment banking, which saw M&A activity fall to a 20-year low in April, recovered in the latter half of the quarter, prompting analysts to forecast better-than-expected revenues and building deal pipelines. Core banking fundamentals also appear solid, with expectations for low-to-mid single-digit growth in net interest income (NII) and lower provisions for credit losses due to resilient consumer and business financial health. An analyst from Wells Fargo noted industry loan growth could accelerate to 5%, up from prior 3% estimates. Following successful stress tests, banks are deploying excess capital through dividend hikes and share buybacks, signaling balance sheet strength. However, performance will vary, with Goldman Sachs projected to see an 11% EPS increase on IB and trading strength, while Bank of America, despite a nearly 7% NII growth estimate, has guided for a slide in investment banking fees to approximately $1.2 billion.

Key Decisions for Investors

• Focus on forward-looking guidance, particularly commentary on the sustainability of loan growth and the strength of investment banking pipelines, as the positive Q2 results may already be priced in.
• Differentiate between institutions, noting the divergent outlooks between investment banking-led firms like Goldman Sachs and Morgan Stanley versus universal banks like Bank of America, which shows strong NII but has signaled weaker IB fees.
• Closely monitor the specifics of capital return strategies, as the magnitude of announced share buybacks and dividend increases will be a key indicator of management confidence and a direct driver of shareholder value.
• While market volatility is a near-term tailwind for trading desks, investors should assess management's outlook on how prolonged economic uncertainty and tariff policies might impact core lending and deal-making confidence in future quarters.