Big banks enter earnings week with Wall Street revenue set to rise

Major U.S. banks are heading into second-quarter earnings with analysts expecting strong gains from trading and dealmaking. CNBC reported that revenue from equities and fixed-income trading could come close to, or top, records reached earlier this year.

JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs are scheduled to report early Tuesday, with Morgan Stanley due Wednesday, CNBC reported. The results will test whether a broad rebound in Wall Street activity, consumer banking and business lending can keep bank stocks ahead of the wider market.

Wells Fargo analyst Mike Mayo told CNBC that banks are benefiting from growth in both their Wall Street businesses and their traditional lending operations. He pointed to the SpaceX initial public offering, a strong pace of mergers and broader trading activity across equities and fixed income in multiple regions.

KBW analyst Chris McGratty estimates that investment banking revenue for the large-bank group could rise 26% from a year earlier, CNBC reported. He also expects trading revenue to climb 14%.

SpaceX deal boosts fee pool

The SpaceX IPO was a major driver of fees for investment banks, according to CNBC. Goldman Sachs and Morgan Stanley led the offering, and banks also earned fees from debt-raising work for the newly public company.

CNBC reported that the banks may also seek wealth-management business from SpaceX shareholders who became newly wealthy after the offering. Jay Ritter, professor emeritus of finance at the University of Florida’s Warrington College of Business, told CNBC that Goldman and Morgan Stanley likely also benefited from “soft dollars” tied to the oversubscribed deal.

Ritter described soft dollars as payments hedge funds make to investment banks in connection with access to shares in sought-after IPOs, CNBC reported. He said those allocations can be more lucrative for banks than standard IPO advisory fees.

Trading desks also had a favorable quarter, McGratty told CNBC. He cited strength in equities as stocks rose, along with increased fixed-income activity after the Iran conflict drove swings in oil, rates and currencies.

Lending shows signs of recovery

Mayo told CNBC that commercial lending may be the more important development for banks this quarter. He said companies are resuming projects and capital spending after a long stretch of weak loan demand, while banks are competing with private credit firms for business tied in part to artificial intelligence-related investment.

That shift could help regional banks such as Fifth Third, Mayo said, because commercial lending makes up a larger share of their business than it does at more diversified companies such as JPMorgan.

CNBC reported that consumer credit also appears steady, helped by low unemployment that has kept many borrowers current on mortgages, auto loans and credit cards. Lower credit losses would support bank earnings beyond the trading and dealmaking businesses.

Risks remain. McGratty told CNBC that competition for deposits could pressure bank margins if some lenders have to pay higher rates to keep customer money. CNBC also noted continuing concern about possible stress in private credit, although that worry has eased without additional high-profile problems after last year’s collapse of subprime auto lender Tricolor Holdings.

After two years of bank stocks beating the broader market, investors are likely to focus less on whether the quarter was strong and more on how long the favorable conditions can last, McGratty told CNBC.

This story draws on original reporting from CNBC.