The Setup Going Into Bank Earnings
The large U.S. banks head into earnings with a mixed tape: Citigroup, Goldman Sachs, JP Morgan Chase, Bank of America, and Wells Fargo. JP Morgan Chase and Bank of America traded higher by about half a cent, while the rest slipped. Many of these names have been benefiting from underwriting tied to a wave of IPOs, so the trading and capital-markets contribution is worth watching. The yield curve steepened, which tends to help banks.
Earnings this cycle are front-loaded into an unusually busy Tuesday. The reason is calendar mechanics. The 4th of July holiday pushed a lot of these releases into the middle of the month. Banks tend to report in the first week when the calendar allows, and this year it didn't.
The broad expectation is higher interest earnings after a year of declining yields across the industry. Investment banking carried the load last quarter and for much of last year, which was a remarkable year for banks. It was also an unusual one, with smaller players and Citigroup leading in terms of market returns.
Citigroup: The Progress and the Weak Spot
Citigroup earns real credit for its turnaround. Jane Fraser has done strong work cutting expenses, and the operating efficiency ratio is now down into the 50s. That's a meaningful move given the bank sat 20 points higher on that measure roughly 18 months ago.
The comparison that matters is a side-by-side of Citigroup against Ally and against peer group one, the top 100 banks. Where does Citigroup fall short? Funding costs. The bank makes a lot of money on assets, so if it could pull funding costs down, it would either earn more or push more of what it earns to the bottom line. The strategic question is where the bank can go out and buy more domestic deposits. That's the real need.
There's a skeptical framing in the mix too: in some respects Citigroup's profile calls to mind LoanDepot. That sits alongside the praise for Fraser's execution, which is why the two views can coexist.
Why the IPO Tailwind May Fade
The IPO side of the equation looks set to slow. The reason is straightforward: stocks are trading off and AI momentum is cooling. AI-related names ran unbelievably hard last year, and that run was momentum-driven rather than grounded. Investors are now looking at deals like Anthropic and others and openly questioning whether they get done.
SpaceX is an instructive case. Getting it public looks like fortunate timing, since the stock has traded poorly since its IPO. The long-term view on it is still constructive because of its upside, but the near-term action underlines the shift in sentiment.
That shift shows up in rates. In the first quarter the conversation was about rate decreases. Since then the market has taken rates up on its own, without the Fed doing anything yet. There's an expectation building that at some point the Fed chair will have to raise rates, and the recent move in yields anticipates that.
The Metric That Matters Most: Credit Costs
The single biggest thing to watch across the banks is whether credit expenses keep falling. Credit costs have declined for six quarters in a row, which is extraordinary given how many people kept predicting a recession last year that never arrived. The open question is whether credit costs start creeping back up. Capital One and a couple of others ticked higher last quarter, while the rest of the industry moved lower on credit. Whether that reverses is the tell for the rest of earnings season and for the read on the consumer.
Return on assets fell somewhere between 25 and 40 basis points last quarter, because banks were positioned for a bond rally that didn't happen. Now the setup runs the other way. Bank yields should increase this quarter alongside the steepening curve. Beyond that, banks should regain more pricing power on loans, an area that has been weak for the past year.
A Neutral Options Trade on Citigroup
Citigroup's stock is up over 60% over the last 12 months and sits near 18-year highs going into its Tuesday morning report, which should be a significant event. The turnaround under Fraser over the last five or six years, the divestitures and expense cuts, largely justifies that move.
The trade idea leans on the elevated implied volatility in next week's options, which capture the earnings event. The thesis is neutral: after this big rally, little movement is expected post-earnings. The structure is a short iron condor, here effectively a short iron butterfly, because the same call and put are sold on the same strike.
Using the July 17th monthly options that expire in 10 days and cover Tuesday's earnings, the trade sells the at-the-money 143 call and the 143 put, which forms a short straddle. To define risk, it buys the wings: the 133 strike put on the downside and the 152.5 strike call on the upside, roughly equidistant.
The credit collected is about $6.20, which is the potential gain at or near the 143 strike. Break-even sits at 136.80 on the downside and 149.20 on the upside, and that's the range the stock needs to hold over the 10 days. The position profits from implied volatility falling after earnings and from positive time decay. There's slightly more risk to the downside than the upside, but the trade stays risk-defined. The ideal outcome is continued consolidation at or near 143, and the wide profitable range gives the position room to work.
