What to expect from bank earnings as high interest rates pressure smaller players

The benefits of scale will never be more obvious than when banks begin reporting quarterly results on Friday.

Ever since the chaos of last year’s regional banking crisis that consumed three institutions, larger banks have mostly fared better than smaller ones. That trend is set to continue, especially as expectations for the magnitude of Federal Reserve interest rates cuts have fallen sharply since the start of the year.

The evolving picture on interest rates — dubbed “higher for longer” as expectations for rate cuts this year shift from six reductions to perhaps three – will boost revenue for big banks while squeezing many smaller ones, adding to concerns for the group, according to analysts and investors.

JPMorgan Chase, the nation’s largest lender, kicks off earnings for the industry on Friday, followed by Bank of America and Goldman Sachs next week. On Monday, M&T Bank posts results, one of the first regional lenders to report this period.

The focus for all of them will be how the shifting view on interest rates will impact funding costs and holdings of commercial real estate loans.

“There’s a handful of banks that have done a very good job managing the rate cycle, and there’s been a lot of banks that have mismanaged it,” said Christopher McGratty, head of U.S. bank research at KBW.

Take, for instance, Valley Bank, a regional lender based in Wayne, New Jersey. Guidance the bank gave in January included expectations for seven rate cuts this year, which would’ve allowed it to pay lower rates to depositors.

Instead, the bank might be forced to slash its outlook for net interest income as cuts don’t materialize, according to Morgan Stanley analyst Manan Gosalia, who has the equivalent of a sell rating on the firm.

Net interest income is the money generated by a bank’s loans and securities, minus what it pays for…