Interest rates take center stage with banks set to report quarterly results

Published Thu, Oct 12 20234:07 PM EDTUpdated Thu, Oct 12 20234:58 PM EDT

Bank stocks remain under pressure due to high interest rates as financial firms like Club holdings Wells Fargo (WFC) and Morgan Stanley (MS) get ready to kick off earnings season. Like other big banks, Wells Fargo and Morgan Stanley have been caught in the throes of the central bank's interest-rate-hiking campaign over the past 18 months. Both have been pulling back on lending to be more conservative with their capital as credit conditions have tightened — with a potentially negative impact on revenue streams and overall profits when the firms report earnings in the coming days. "Increasingly, I think that the only thing that can change things with either bank is the end of the tightening cycle so people will be less worried about credit woes," Jim Cramer said Wednesday . As part of its effort to battle persistent inflation, the Fed has raised its benchmark interest rate 11 times since March 2022, with rates at their highest levels in 22 years . On top of operating in a high-interest-rate environment, financial firms are still rebounding from the collapse of a string of regional lenders, starting with the shuttering of Silicon Valley Bank (SVB) in March. Wells Fargo and Morgan Stanley are down on the year amid the difficult backdrop, falling 4.3% and 8.6%, respectively. The KBW Bank Index , a benchmark stock index of the banking sector, has lost more than 24% year-to-date. Still, both Club banks have solid fundamentals and diverse revenue streams that leave us bullish in the long term. Wells Fargo is set to report third-quarter results before the opening bell on Friday, while Morgan Stanley is slated to post results next Wednesday. WFC YTD mountain Wells Fargo (WFC) year-to-date performance For the three months ended Sept. 30, analysts expect Well Fargo to report revenue of $20.1 billion, compared with $19.5 billion during the same period a year prior, according to Refinitiv. Earnings-per-share should come in at $1.24, up 45% year-over-year, Refinitiv estimates showed. Wells Fargo's cost-cutting measures and its forecast for its real estate loans will be front and center Friday. Out of the major U.S. banks, Wells Fargo has the largest exposure to the ailing commercial real estate market, an industry troubled by higher rates and near-record office vacancy levels. Offices represent roughly 22% of Wells Fargo's outstanding commercial property loans and 3% of its whole loan book. In the bank's July earnings report, CEO Charlie Scharf said Wells Fargo sustained "higher losses in commercial real estate, primarily in the office portfolio," adding that while there have been "significant losses in our office portfolio-to-date, we are reserving [capital] for the weakness that we expect to play out in that market over time." Wells Fargo "remains focused on making the company more efficient and has been reducing headcount" since the third quarter of 2020, Barclays analysts wrote in a recent note. In September, Chief Financial Officer Mike Santomassimo said the bank could slash headcount further, on top of nearly 40,000 layoffs over the past three years. Meanwhile, Wells Fargo slowed its pace of stock buybacks significantly over the past few quarters, even though the stock is at a lower price point and the bank remains well-capitalized. "My hope is that this Friday [Scharf] changes his mind when the company reports and it can sop up the excess stock," Jim said. Scharf "has bought back 300 million shares, almost a tenth of the share count, since he took over in 2019," Jim added. MS YTD mountain Morgan Stanley (MS) year-to-date performance For the three months ended Sept. 30, analysts expect Morgan Stanley to report revenue of $13.2 billion, up from $12.9 billion during the same period last year, according to Refinitiv. Earnings-per-share should fall 16% year-over-year, to $1.28. For the past several quarters, Morgan Stanley's investment banking business – once crucial to its bottom line – has been lagging on macroeconomic uncertainty. Companies have pulled back on mergers and acquisitions amid growing concerns that a recession is on the horizon. Indeed, the value of global M & A plunged 44% in the first five months of 2023, according to data analytics firm GlobalData . During a recent conference, Morgan Stanley executives said that capital markets will likely improve in 2024, potentially setting up its investment banking division for a stronger year. The bank said its "more confident now than any time this year about an improved outlook for 2024." Morgan Stanley has adapted to the struggling M & A and initial-public-offering markets by leaning more into wealth management, a strategy we think highlights the bank's ability to deftly navigate a range of headwinds . "Morgan Stanley is doing everything it can to be less of a bank and more of a financial advisor," Jim said Wednesday. And, with Chief Executive Office James Gorman expected to retire early next year, we'll be looking for any further guidance from the company on its succession plans. (Jim Cramer's Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.

Reuters

Bank stocks remain under pressure due to high interest rates as financial firms like Club holdings Wells Fargo (WFC) and Morgan Stanley (MS) get ready to kick off earnings season.