By Nupur Anand

NEW YORK (Reuters) -As U.S. banking giants prepare to report slightly lower first-quarter profits, investors will focus on how much more income executives expect from interest payments this year.

JPMorgan Chase is likely to post a 4% drop in earnings per share (EPS) from the year-ago quarter on Friday, analysts estimated in an LSEG survey. Declines of 35% and 11% are forecast for Citigroup and Wells Fargo, respectively.

Goldman Sachs is expected on Monday to post a 13% slide. On Tuesday, Bank of America is likely to show a 18% decline, while Morgan Stanley is seen announcing a 2% drop, analysts said.

Analysts are weighing how the path of U.S. interest rates will bolster banks’ net interest income (NII), or the difference between what lenders earn on loans and pay out for deposits.

“This is the overarching theme this quarter and we are likely to see an upside for earnings,” said Kenneth Leon, research director at CFRA Research.

Banks have reaped record profits in recent quarters as the Federal Reserve started raising interest rates in March 2022 to tame inflation. Their NII outlook is closely watched as a barometer for future earnings.

Executives’ commentary this quarter will be more closely scrutinized as the market scales back expectations for the Fed to cut rates three times this year from earlier estimates of six.

JPMorgan, Bank of America and Wells Fargo could benefit from higher-for-longer rates that boost their NII, Morgan Stanley analysts led by Betsy Graseck wrote in a note.

U.S. consumer prices increased more than expected in March as Americans continued to pay more for gasoline and rental housing, leading financial markets to anticipate that the Fed would delay cutting rates until September.

“Likely later and less Fed rate cuts post CPI gives us some pause … given potential delay for NII inflection,” wrote Mike Mayo, an analyst at Wells Fargo.

Elevated rates may strain the finances of consumers who are increasingly falling behind on loan payments, prompting lenders to set aside more money to cover potential losses.

“There could be an uptick in delinquencies and the consumer-led growth could moderate, but I do not expect it to impact earnings in a big way,” said Chris Marinac, director of research at financial adviser Janney Montgomery Scott.

Banks serving both retail customers and corporations have fared slightly better in the first quarter than rivals focused on Wall Street dealmaking which has been in the doldrums for several quarters.

Citigroup, Wells Fargo and JPMorgan have been the best-performing stocks so far this year in the S&P 500 banks index. So far in 2024, Citigroup shares are up 17% as of Wednesday’s close, Wells Fargo is about 16% higher and JPMorgan has risen nearly 15% against a roughly 11% gain for the S&P 500 banks index.

Mergers and acquisitions have shown signs of rebounding in the first quarter after falling to their lowest level in 10 years globally in 2023. Bankers have expressed more optimism about a recovery this year.

“The dialogue is going to be very strong this quarter for Wall Street banks,” said KBW analyst David Konrad, referring to merger talks. “Capital market activity is picking up and it is going in the right direction.”

A revival would boost earnings at Goldman Sachs and Morgan Stanley, whose earnings are more reliant on investment banking revenue.

The outlook for trading will also be an important indicator, Graseck said.

JPMorgan, the largest U.S. lender, said in February that its markets revenue could decline 5% to 10% in the first quarter.

At Citigroup, investors are awaiting updates from CEO Jane Fraser on her growth strategy after she started a sweeping reorganization in September and laid off 5,000 employees through the end of the first quarter.

“This is time for progress,” said Marinac, expressing optimism about bank prospects. “I don’t think there was much to expect in the first year, but we’re through that first year and I think there should be some modest progress.”

Leadership will also be in focus at JPMorgan, where the board has identified potential successors to CEO Jamie Dimon, paving the way for an eventual leadership transition at the largest U.S. bank.

Elsewhere, investors are tracking Wells Fargo’s progress to meet government demands to fix its problems and lessen its regulatory punishments, including an asset cap that limits its growth.

BANK EPS Q1 EPS Q1

2024* 2023

JPMorgan 4.15 4.32

Chase

Bank of 0.77 0.94

America

Citigroup 1.20 1.86

Wells 1.09 1.23

Fargo

Goldman 8.62 9.87

Sachs

Morgan 1.66 1.70

Stanley

*LSEG mean estimates

(Reporting by Nupur Anand in New York; Editing by Lananh Nguyen and Richard Chang)

---