The third-quarter earnings season for U.S. banks will officially kick off this Friday, with major financial institutions like JPMorgan Chase & Co. (JPM  ), Wells Fargo Corp. (WFC  ), and Bank of New York Mellon Corp. (BK  ) set to report their results.

The following Tuesday will see additional earnings releases from mega-cap players such as Bank of America Corp. (BAC  ), Goldman Sachs Inc. (GS  ), and Citigroup Inc. (C  ), as well as some regional banks.

Banking Sector Performance So Far In 2024

Thus far, in 2024, the banking sector has shown strong performance. The Financial Select Sector SPDR Fund (XLF  ), which tracks major financial stocks, has risen 21% year-to-date, matching the performance of the broader market as represented by the SPDR S&P 500 ETF Trust (SPY  ).

However, regional banks have lagged behind their larger counterparts. The SPDR S&P Regional Banking ETF (KRE  ) is up just 6% year-to-date, though it has outperformed over the past three months. This recent rebound is largely due to falling inflation and increasing expectations of Federal Reserve interest rate cuts.

With earnings season approaching, the question on many investors' minds is whether large banks will maintain their positive performance gap over regional players or if recent market developments will impact their results and outlooks.

Here's what Wall Street analysts are saying ahead of the bank earnings season.

Analyst Expectations And Top Picks

RBC Capital Markets - Gerard Cassidy, co-head of global financials research

"We believe the set-up looks very good for banks over the next 12-18 months. We expect the Federal Reserve to cut short-term interest rates by 200-250 basis points over this period, and the finalization of the Basel III 'endgame' proposal will allow banks to return excess capital through buybacks and dividends. We continue to recommend an overweight position in bank stocks."

Top Picks (RBC holds earnings per share estimates for both above Street consensus for the third quarter)

JPMorgan Chase & Co. - Anthony Elian, CFA

"As the Federal Reserve reduces rates, several industry headwinds could turn into tailwinds." This includes:

  • Lower deposit costs, improving net interest margins (NIMs)
  • An uptick in commercial loan demand
  • Easing credit quality concerns, particularly for banks with commercial real estate (CRE) exposure
  • A resumption of buyback programs as reserves are released
  • Increased exit market and venture capital activity.
Top Picks:

Wedbush Securities - David J. Chiaverini, CFA

"We expect mixed trends for banks in Q3, with modest loan and deposit growth, stabilizing deposit mix shifts, and NIMs benefiting from fixed asset repricing. Some banks will be more positively positioned than others in this environment."

Top Picks:

Wedbush believes Columbia Banking Systems will benefit from a lower rate environment as it is liability-sensitive, unlike most banks that are asset-sensitive.

Bank of America - Ebrahim H. Poonawala

"We favor regional banks over large money centers heading into Q3, given better net interest income (NII) defensibility and greater capital relief as mark-to-market losses on bond books decrease. Our top ideas going into Q3 earnings include a mix of regionals and larger financial institutions."

Top Picks:

  • U.S. Bancorp (USB  )
  • Western Alliance Bancorporation
  • PNC Financial Services Group Inc. (PNC  )
  • Fifth Third Bancorp (FITB  )
  • M&T Bank Corp.
  • Truist Financial Corporation
  • Morgan Stanley (MS  )
  • Goldman Sachs Inc.
  • Bank of New York Mellon Corp.
Goldman Sachs - Richard Ramsden

Goldman Sachs is particularly optimistic about Citigroup heading into Q3 earnings, citing the bank's progress toward its 2024 targets driven by strong fee growth, solid capital markets activity, and robust card volumes.

Ramsden is above consensus on Citigroup's Q3 pre-provision net revenue (PPNR), largely due to expectations of higher fees and capital markets activity.

Top Pick: