KBRA Financial Intelligence

Bank Earnings Reveal Preparations for Economic Uncertainty

Equities Volatility Steadied by Earnings Season

Shares of publicly traded U.S. banks have recently been hard hit by tariff uncertainties and a resulting U.S. growth scare. KFI data shows that the combined market capitalization of 340 publicly traded U.S. banks have declined by as much as $870 billion in 2025. The KBW Nasdaq Bank Index (BKX), which tracks the share prices of 24 publicly traded banks, is 22% below its February 18 peak, falling more steeply than the S&P 500’s 16% decline throughout the same period.

The banking sector managed to rebound slightly in the wake of 1Q 2025 earnings reports after key institutions exhibited stronger financial results than anticipated last week. Earnings per share (EPS) figures reported by JPMorgan Chase & Co. (KFI Score: B+), Bank of America Corp. (KFI Score: B), Wells Fargo & Co. (KFI Score: B), Citigroup (KFI Score: B+), Morgan Stanley (KFI Score: A-), and The Goldman Sachs Group (KFI Score: B+) each surpassed analyst estimates. Although this was enough to stem the rapid decline in valuations that kicked off earlier this month, the future remains highly uncertain for banks.

A number of large banks have acknowledged that difficulties may lie ahead, with in-house analysts revising their economic growth forecasts and executives speaking candidly about the reverberations of the U.S.’s aggressive trade policy. At the end of March, Goldman Sachs raised its projected probability of a U.S. recession within the next 12 months from 20% to 35%, ramping that figure even further to 45% in April. JPMorgan Chase CEO Jamie Dimon shared a similar sentiment during his bank’s earnings call, noting that his bank’s economists see recession odds at “about 50-50.”

Banks Build Reserves to Counter Uncertainty

Dimon also noted that “if there's a recession, credit losses will go up,” which the bank is apparently positioning for by increasing allowances for credit losses. These are contra-accounts—often referred to as loan-loss reserves (LLR)—that banks use to offset future losses on outstanding loans that may have fallen into delinquency and could eventually be charged off. JPMorgan Chase reported quarterly credit costs of $3.3 billion, including a $1 billion addition its firmwide allowance for credit losses, which now totals $27.6 billion. The latest reserve build accelerated from 4Q 2024’s provisioning of $300 million, a sharp reversal from the same quarter in 2024 when JPMorgan Chase had reduced its LLRs. Fellow large banks like Bank of America and Morgan Stanley also increased the pace of provisioning for credit losses, along with some midsize institutions like Huntington Bancshares (KFI Score: B).

After reaching a nearly four-year high last December, LLRs had begun falling in the wake of a drop in charge-offs throughout 4Q 2024. The drop marked the first decline in U.S. banks’ charge-off rate in the past 11 quarters, signaling that a gradual buildup of bad loans had begun to ease. However, the drawdown in LLRs did not last, as banks began to reverse this trend in mid-February, preparing for the impact of impending tariffs on the economy. KFI has recently analyzed the potential negative implications of tariffs on construction and auto lending, which have been experiencing contraction on an annual basis.

Funds provisioned as LLRs are recorded on the income statement as an expense since there is a chance that the funds will be required in the future to counter lending losses. Conversely, if banks overprovision in anticipation of greater losses that never materialize, LLRs can be released and reclaimed as income in later quarters. KFI has previously noted that, from March 2021 to June 2022, U.S. banks released a significant portion of their LLRs, reducing them by $58.76 billion—equivalent to 27.2% of total LLRs at the time—which helped to supercharge the profits of numerous publicly traded parent organizations of U.S. commercial banks.

Lending and Trading Growth May Face Differing Fortunes

KFI data indicates that year-over-yar (YoY) growth in lending among U.S. commercial banks slowed significantly in the period 2022-23 but regained ground in 2024 and stabilized at 2.2% in the final two quarters of the year. The origination of new loans is not only increasingly uncertain if economic growth slows, but so is the profitability of banks’ lending activities. U.S. Treasury yields have been experiencing volatility in 2025, largely remaining below short-term yields such as the 3-month T-bill’s. The yield on the 10-year Treasury note closed out 1Q 2025 more than 30 basis points (bps) lower than its level at the start of the year, falling below 4.25%, while the 3-month yield ended the quarter at 4.30%.

This shift in long-term yields carries significant implications for banks, whose profitability relies on their ability to fund long-term lending using deposits and other funding generally acquired at short-term rates. Several banks have cited margin compression as a hurdle for expanding net interest income (NII) in their 1Q 2025 earnings reports. Notably, JPMorgan Chase’s earnings press release mentions “deposit margin compression” negatively impacting its non-markets NII. The term refers to higher costs on deposits relative to the income generated from them, which can play a role in reducing net interest margin (NIM). Wells Fargo and Truist Financial Corp. (KFI Score: B) reported 3-bp and 6-bp declines in their NIMs, respectively, compared to the previous quarter.

The 10-year yield staged a rally in the early days of 2Q 2025 but remains roughly 50 bps from its 2025 high near 4.90%. If the U.S.’s economic expansion does show signs of slowing in the months ahead, lower long-term yields would be expected to follow, potentially putting further pressure on bank margins if the Federal Reserve continues to hold short-term rates steady.

Large banks with sales and trading divisions were able to rely on surging trading revenues to bolster earnings, despite concerns surrounding the profitability of commercial bank lending. Among the five largest U.S. bank holding companies by trading revenue, each institution exhibited YoY growth in consolidated revenue generated by their equity, fixed income, currency, and commodities trading businesses. The average annual gain in trading revenue among the banks was equivalent to 16%, while continued market volatility would keep trading desks busy and further bolster this line of business for banks.

The emergent trading boom may further widen perpetuate an ongoing divergence in the headcount of bank holding companies (BHC) and their commercial banking subsidiaries. KFI recently highlighted a wave of ongoing job cuts that have reduced commercial banks’ headcount by more than 77,000 full-time employees since 2023. However, throughout that same period, the number of non-commercial bank employees among the U.S.’s BHCs has increased by almost 20,400. This suggests that BHCs have been determined to continue expanding their securities and investment banking divisions, even as material consolidation of the commercial bank workforce has taken place.