The biggest US banks will kickstart the third quarter earnings parade, with JP Morgan Chase, Morgan Stanley and Citigroup reporting their financial results on Friday before Wall Street’s opening bell. This earnings season will likely garner a lot of attention as it will assess companies’ resilience amid a continuously deteriorating macro environment, while major US banks’ performance often acts as a proxy for the health of the broader domestic economy. That being said, banks are expected to report a significant slump in profits despite the favourable environment of rising interest rates.

In a year of aggressive monetary tightening by the Fed, US banks were expecting that the continuously rising interest rates would enhance their fundamentals. Specifically, financial institutions were anticipated to capitalize on higher net interest margins, which are essentially the difference between the interest income generated by long-term assets such as loans and the interest expense paid to short-term liabilities such as deposits.

However, concerns about slowing economic growth and a potential recession have weighed on both their performance and share prices, with most lending institutions preparing to set aside more capital to cover a new wave of non-performing loans (NPLs). Meanwhile, mortgage originations will probably decline due to higher interest rates accompanied by increasing macro jitters in the housing market such as surging raw materials and labour costs. The aforementioned fears have intensified after news emerged about a potential insolvency event of the Swiss giant Credit Suisse, albeit US banks would probably not face significant systemic contagion.

Apart from their traditional loan business, banking giants generate revenue mainly from investment banking, wealth management and trading fees. The extensive stock market downturn since the beginning of the year coupled with Russia's invasion of Ukraine, flooded markets with uncertainty, causing a significant ‘drought’ in the initial public offerings (IPOs) market, especially compared to last year’s boom.

To make matters worse, wealth and asset management commissions are also anticipated to have taken a hit due to the ongoing massacre in both stock and bond markets this year. In addition, trading fees will probably fail to surpass last year’s figures as the drain of excess liquidity by central banks has largely weighed on trading activity.

JP Morgan is set to post a mixed performance as modest improvements in interest margins and loan volumes have been offset by weakness in the mortgage and investment banking businesses. On Monday, the bank’s CEO Jamie Dimon stated that the US economy will probably dive into recession next year, which will inflict severe damage on both credit and stock markets, with these remarks probably stemming from insights into JP Morgan’s data, metrics and performance.

Therefore, the bank is anticipated to post revenue of $32.08 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year increase of 5.14%. In addition, Earnings per share (EPS) are estimated to rise modestly to $2.91 from $2.60 last quarter, decreasing though by 22.31% on an annual basis.

Morgan Stanley will probably be the underperformer in this quarter, even though its share price has been faring moderately better relative to both US indices and competitors. Nevertheless, its weakness should be reasonable considering that it generates an overwhelming amount of its revenues from trading and investment banking fees.

The New York City-based investment bank is expected to report earnings of $1.49 per share in the third quarter of 2022, which would mean a 24.90% annual decline. Moreover, revenue is also projected to decrease by 10.47% on a yearly basis, to $13.21 billion.

Compared to the other two, Citigroup has a wider traditional banking business and relies less on its broker and deal making activities. Therefore, even if its profits are expected to come under pressure, revenue is projected to increase significantly.

The banking behemoth is set to announce revenue of $18.31 billion, which would produce a 6.76% year-on-year growth. However, EPS is anticipated to decline by 31.67% on a yearly basis to $1.47.

All the three examined banks have forward 12-month price to earnings (P/E) ratios that are significantly lower than the banking services sector’s average of 18.8, indicating that they are attractively priced. Moreover, their valuation remains cheaper than that of the S&P 500, indicating that the recent sell-off might be a chance for investors that are positive on the major US banks’ prospects to step into the market and purchase their shares.