Bill Cara

Why do the most prominent US banks lead off earnings season?

October 11, 2024

The biggest US banks and financial services companies, JPMorgan (JPM), Wells Fargo (WFC), Bank of New York Mellon (BK), and BlackRock (BLK), are reporting earnings today. I asked AI why they report before most major US corporations for several key reasons:

The answer from ChatGPT is that, in summary, regulatory requirements, efficient financial processes, market leadership, and historical precedence are the main reasons large U.S. financial institutions tend to report earnings before other corporations. Their reports offer critical early insights into the economic landscape, shaping investor sentiment as earnings season progresses.

AI’s answer, not like mine, which I’ll write about sometime, is as follows:

1. Regulatory and Market Leadership:

Banks are highly regulated institutions closely tied to the economy and financial system. They are the first to feel the impact of economic changes such as interest rate shifts, inflation trends, and macroeconomic policies. As a result, their earnings reports provide early insights into the economy’s health, making it important for them to report sooner. Market participants, regulators, and investors often consider the banks’ earnings as leading indicators for the broader market, particularly regarding credit conditions, liquidity, and economic sentiment.

2. Complex Reporting Frameworks:

While banks have complex accounting systems, they are often well-prepared in advance. Major financial institutions have highly developed financial reporting processes and systems, which allow them to close their books and report quickly and efficiently. The complexity of their accounting systems is offset by their rigorous regulatory requirements and established reporting schedules, particularly for managing capital adequacy and risk under frameworks like Basel III and the Dodd-Frank Act. This regulatory scrutiny drives banks to maintain high readiness levels, contributing to their ability to report earlier.

3. Quarterly Close Coordination:

Due to the nature of their business, financial services companies often start their quarter-end processes earlier. Since they deal with transactions that must be recorded promptly (e.g., lending, trading, and asset management), they have established routines for rapidly closing books and reviewing financials. Unlike many corporations, the closing process may involve more varied revenue streams and complex consolidations, leading to longer timelines.

4. Investor Expectations:

The market often expects banks to report first, as their earnings set the stage for understanding economic trends, such as credit quality, interest rate margins, and overall economic activity. Investors are keen to understand the financial sector’s performance as a prelude to earnings season for other industries, given that banks are intertwined with almost every sector through lending, investment, and asset management.

5. Historical Precedence:

Banks have historically been early reporters, setting a long-standing pattern. This scheduling tradition helps maintain consistency in the reporting calendar, and other sectors have come to follow this pattern. This allows the market to digest the financial health of banks before focusing on other industries.

6. Market Volatility and Sensitivity:

Financial stocks are particularly sensitive to quarterly results, given that even small changes in interest rates or loan loss provisions can significantly affect a bank’s profitability. Reporting earlier helps reduce uncertainty in the market and allows investors to adjust expectations for other industries based on the financial sector’s health.