What to look for when the major banks report earnings

CNBC’s Jim Cramer analyzed several major banks’ performances on Wednesday, telling investors what to look out for when JPMorgan, Citigroup, Bank of America and Wells Fargo release earnings reports on Friday.

These reports can set the tone for earnings season, he said.

“If you believe, as I do, that interest rates have peaked and that our economy’s almost certainly in for a soft landing — thank you, [Fed Chair] Jay Powell — then the banks should be worth owning right now,” he said. “But let’s see what happens when the four big money centers report on Friday.”

Cramer listed JPMorgan as one outfit that remains fairly well-liked on Wall Street, betting that its stock “can grind higher” over time, but may not be a top pick for the year. Bank of America and Citigroup need a few positive quarters to earn investors’ trust, with the latter especially having to prove a comeback story after it announced a major restructuring effort in September, he said.

Cramer said he’s most excited about Wells Fargo’s prospects, even though the stock recently saw two analyst downgrades. He said the company’s new management is committed to cutting costs and improving technology and suggested there may be an imminent buying opportunity.

According to Cramer, investors should pay special attention to net interest income and net interest margin, which measure what banks earn from borrowing deposits and then lending those funds at higher rates. This data can indicate the performance of a bank’s core business.

Investors should also follow commentary closely, especially about the state of consumer and corporate credit, Cramer said. Banking stocks could decline if credit quality proves to be poor, but robust credit could lead to higher earnings estimates for the rest of the year. As major credit card issuers, these outfits may also offer insight into consumer spending habits.

Finally, Cramer advised to keep an eye on financial institutions’ investment banking operations. He said there is optimism on Wall Street for a comeback this year in the sector, spurred by a burgeoning initial public offering market and more bond issuance.

“We’ve also seen a pickup in M&A, which is great for investment bankers — the advisory fees they get on these deals are phenomenal,” he said. “An investment banking comeback could allow the financials to give us some excellent performance this year.”

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Disclaimer The CNBC Investing Club Charitable Trust holds shares of Wells Fargo.