Big banks churned out more profits for much of 2023 as regional lenders struggled, but their performance in the first quarter of 2024 is not expected to dazzle.

Investors may not mind, as long as the giant banks can demonstrate how they benefit if interest rates remain higher than expected this year.

"At the end of the day, what is the market paying attention to?" said Ken Leon, a large bank analyst for CFRA Research.

"It's really looking to what these banks will do for the rest of 2024 and 2025."

Analysts expect JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) and Bank of America (BAC) to report that their first-quarter profits were up from the fourth quarter of 2023 but down when compared to the same year-ago period.

That year-over-year drop for all four institutions hasn’t happened since the Federal Reserve began raising interest rates in the second quarter of 2022. JPMorgan, Wells Fargo and Citigroup release results Friday, and Bank of America on Tuesday.

Their numbers will likely demonstrate that even the biggest banks are wrestling with slower loan demand and mounting troubles for some borrowers. Bad debt write offs are expected to surge by 76% and new provisions set aside to cover future loan losses are expected to jump 31%.

Much of the increase in write-offs will likely come from souring credit card loans, according to David Fanger, a senior vice president with Moody's Ratings.

But investors may be more interested in the rest of 2024 than the first quarter. So far this year they have been rewarding the biggest banks at the expense of smaller rivals.

The stock of Citigroup has climbed more than 18% while Wells Fargo and JPMorgan are each up 15% or more so far this year — outperforming major indexes. Bank of America has risen 8%.

What could help drive those stocks higher is if the banks predict more profits for the rest of the year due to changing expectations of how many rate cuts are expected this year from the Fed.

Traders now expect one or two cuts, instead of the six they predicted at the beginning of the year, due to hot economic data and signs of persistent inflation.

Fewer cuts actually benefit the giant banks because it allows them to charge more for their loans while keeping funding costs relatively low, boosting a key measure of profits known as net interest income. That dynamic helped them churn out profits for much of 2023.

“Every time the number of rate cuts and timing is pushed out, the street is updating their expectations of what net interest income could look like this year," Ebrahim Poonawala, a large bank analyst for BofA Securities, told Yahoo Finance.

Gerard Cassidy, a large bank analyst for RBC said in a research note Monday that as 2024 progresses “we could see upward revisions to EPS estimates driven by better-than-expected net interest income growth and outperformance on credit quality.”

What could also help the stocks of big banks is more optimism about dealmaking and trading for the rest of 2024. That issue will be of particular interest to stockholders of Goldman Sachs (GS) and Morgan Stanley (MS), two Wall Street-reliant institutions that report Monday and Tuesday.

The big banks are expected to report that first-quarter revenues from underwriting bonds and IPOs rose while advising on mergers and acquisitions still lags — extending a problem that challenged banks for much for 2023 and 2022.

"What you’ve seen is the debt underwriting business picking up significantly," said BofA's Poonawala, who also pointed out that regulatory scrutiny hasn't been conducive to big deals.

M&A recovery also just takes longer, according to Moody's Fanger.

"What's being completed in this quarter were deals that were agreed to in Q2 or Q3 of last year," he said.

Trading revenues are expected to be down across the board from last year, although Bank of America could buck the trend, according to analyst estimates.

Investors may not be as kind to regional banks as they begin reporting results in the coming weeks. Mid-sized lenders are expected to struggle more if the Fed does in fact keep rates higher for longer, since they have been paying much more than giant lenders to keep their deposits intact.

Regional banks also face more exposure to some commercial real estate loans that have lost value and need to be refinanced, an emerging source of problems for some institutions such as New York Community Bancorp (NYCB).

"Bigger banks’ revenues are more diversified and they don't have as much commercial real estate exposure," Chris McGratty, a regional bank analyst and head of US bank research for KBW, told Yahoo Finance.

For all of 2024, KBW expects big bank profits to rise 4%. Regional and smaller lenders will see a 9-10% drop in their net income for the same period.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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