Wall Street banks are poised to reveal higher profits for the second quarter, as the impact of rising interest payments offsets a downturn in dealmaking. Analyst estimates from Refinitiv I/B/E/S indicate that universal banks, including JPMorgan and Wells Fargo, serving both retail consumers and corporations, are expected to witness a more than 40% surge in earnings per share (EPS). Bank of America’s EPS is likely to climb over 7%, while Citigroup may experience a 43% drop in EPS.

Conversely, investment banking giants are expected to face weaker results, with Goldman Sachs’ EPS forecasted to decline by almost 59%. Morgan Stanley’s EPS is anticipated to drop by 9%, although revenue from wealth management is likely to mitigate the impact of lackluster dealmaking.

Universal lenders have benefited from the resilience of American consumers who continue to spend money and maintain a favorable financial health outlook, according to David Konrad, an analyst at Keefe, Bruyette & Woods. This has offset the challenges faced by investment banking divisions, where revenues have been affected by rising interest rates and economic uncertainty.

Stephen Biggar, an analyst at Argus Research, noted that Goldman Sachs is expected to have a challenging quarter in investment banking, with lackluster trading performance due to lower volatility. Additionally, the bank may take a writedown on its consumer business.

The deal markets continue to be a sore spot for Wall Street, as global investment banking activity plummeted to $15.7 billion in the second quarter, the lowest since 2012, according to Dealogic data.

Banking executives have already lowered their expectations for the second quarter due to a decline in mergers, acquisitions, and debt offerings in recent months. However, there are indications of a potential recovery in equity capital markets for the second half, as a nascent revival in initial public offerings emerges.

When interest rates rise, lenders typically benefit from charging customers higher borrowing rates. However, demand for loans is slowing, and banks are paying higher interest rates to keep customers’ deposits while they seek better-yielding alternatives.

According to KBW analysts, deposits at large lenders declined by $141 billion in the second quarter. This reversal followed an influx of deposits into major banks in the first quarter, driven by customers seeking safety after the collapse of several regional banks.

Looking ahead, banks may exercise caution in lending to prepare for potential new regulations that could require them to hold more capital. In June, U.S. banking giants successfully passed the Federal Reserve’s annual stress test, demonstrating their ability to withstand severe economic downturns. Following the results, these lenders increased their dividends.

Although the U.S. added fewer jobs than expected in June, wage growth and employment remain strong. Traders’ expectations suggest that the hot job market will likely keep the Federal Reserve on track to raise interest rates in July.

Analysts and investors will closely scrutinize executives’ commentary on loan growth and credit quality. Betsy Graseck, an analyst at Morgan Stanley, emphasized that executives’ insights will shed light on the potential need for even higher interest rates, given the positive credit conditions. However, Kenneth Leon, research director at CFRA Research, warned of higher default risks on personal loans and credit cards for lower to middle-class families grappling with increasing living costs.

Additionally, office loans pose concerns for some U.S. lenders as property values decline and more borrowers default. Investors will closely monitor any provisions set aside by banks for potentially deteriorating loans in commercial real estate.

So far this year, the S&P 500 banks index has fallen 9.3%, underperforming the S&P 500 index, which has experienced a 14.6% gain.

In conclusion, despite a decline in dealmaking, Wall Street banks are expected to announce higher profits for the second quarter, primarily driven by rising interest payments. Universal banks, benefiting from robust consumer spending and financial health, are anticipated to witness substantial increases in earnings. However, investment banking divisions may experience declines due to lackluster deal activity. The sluggish deal market and potential credit quality risks remain areas of concern for the banking industry.