Investors are on the lookout for more signs of trouble lurking in the U.S. financial system.
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Big banks raked in record profits in 2023 but face growing pressures this year. Losses from commercial real estate and bond portfolios are mounting, and bank stocks have lagged behind the broader market rally.
“Fear of rates, recession and regulation have overtaken the reality of performance for bank stocks,” said Mike Mayo, the influential Wells Fargo analyst.
JPMorgan Chase, Wells Fargo and Citigroup will report first-quarter earnings Friday. Goldman Sachs reports Monday, and Bank of America and Morgan Stanley are on tap for Tuesday.
As they detail their first-quarter performance, the banks will also give full-year outlooks, which investors and analysts will watch closely for signs of whether the fears will be borne out.
A particularly sensitive subject for investors is commercial real estate. Banks hold around 50% of all the debt backing office, retail, and other nonresidential properties in the U.S.
Federal Reserve Chair Jerome Powell has said there will be more bank failures, after a trio of lenders collapsed last year, because of the correction in office and other property values. New York Community Bancorp received an emergency injection of $1 billion in March after reporting a surge in real-estate loan losses.
In late March, credit-rating firm S&P said the financial outlook for five regional banks, including Morristown, N.J.-based Valley Bank and Buffalo, N.Y.-based M&T Bank, was worsening because of their outsize commercial real-estate exposure.
It isn’t just smaller banks and commercial real estate. Bank write downs of credit-card and auto loans have been rising and analysts expect they ticked up further in the first quarter.
Losses on banks’ securities portfolios are also piling up. Some banks, including Wells Fargo and Bank of America, invested billions of their customers’ deposits in mortgage bonds and other securities after a flood of cash entered the banking system during the pandemic.
After the Fed started raising interest rates to curb inflation, the value of those bonds fell, pushing up unrealized losses on securities in the banking system to $478 billion as of Dec. 31, according to data from the Federal Deposit Insurance Corp. That amounts to around 20% of all shareholder capital in the banking system, according to Torsten Slok, chief economist at investment firm Apollo Global Management.
Analysts expect that those losses rose between January and March as yields increased and prices fell because of an increasing belief that interest rates will remain higher for longer.
Even though banks are likely to ultimately recoup most of the money they invested in these securities, in the meantime it is tied up at lower rates.
Officials have signaled they expect three rate cuts before the end of 2024, but some investors and economists think the Fed might not cut rates at all this year. That view gained steam Wednesday, when inflation came in higher than economists had expected for March.
A plateau in interest rates isn’t good for banks. Loan demand from companies has been slowing as debt becomes more expensive, while banks have to pay up for customer deposits.
One bright spot in the first quarter: A strong stock market and hopes for rate cuts helped grease capital markets and merger activity in January and February. Global investment-banking revenue totaled $19.8 billion in the quarter, an 11% bump compared with the year before, according to Dealogic.
Write to Alexander Saeedy at alexander.saeedy@wsj.com