U.S. banks are preparing to release their earnings for a second quarter which was characterized by soft trading volumes, dreary client activities, high legal costs and slowdown in reserve release. Decline in fixed income, currency and commodities was also prominent during the quarter.
The overall backdrop was once again similar to the first quarter when earnings were marred, with only a few catalysts saving grace. Naturally, we have an antsy market wondering whether banks managed to put up a better show this time around. The big question on everyone’s mind is, will ‘beat’ dominate ‘miss’ in the second quarter banking results?
Though results are not expected to be as feeble as in the first quarter, the tide may not reverse. The broader Finance sector, of which U.S. banks are part, is expected to witness a 3.6% earnings decline in the quarter, primarily due to a 6.9% decline in revenues. This compares favorably with earnings and revenue declines of 7.1% and 15.2%, respectively, last quarter.
Looking at the 7 medium-level (or M-level) industries in the sector, it appears that Major Banks suffered the most during the quarter and are expected to report a 13.5% year-over-year earnings decline. Banks & Thrifts were also not in a good shape and could witness a 2.8% earnings decline.
(For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report)
What Might Have Hurt Q2 Results
A significant decline in capital market revenues is expected to be the major dampener for a number of banks. This is because of the continued downtrend in fixed income, currency and commodities. Among the mega banks, JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) have already disclosed that they expect the decline in market revenues in the second quarter to be higher that what they witnessed in the first. (Read: JPMorgan to Witness 20% Drop in Q2 Market Revs and Citigroup Expects Bleak Q2 Revenues)
A dearth of significant loan growth and pressure on net interest margins from the prolonged low rate environment were other nagging issues that continued to hurt banks.
Further, mortgage banking activities remained sluggish and legal costs climbed.
Factors to Breathe Easier
All eyes are on the mergers and acquisitions (M&A) that should have earned a higher fee income for banks that had played the role of advisors.
Secondly, aggressive cost control through streamlined operations and job cuts should have propelled the bottom line.
Finally, a favorable equity and asset market backdrop as well as encouraging macroeconomic factors – falling unemployment, progressive housing sector and flexible monetary policy – are likely to have lent some support to the financials of banks.
Earnings of Mega Banks in Focus
Based on our proven model, we are not confident about earnings beats for most of the industry leaders. According to Zacks methodology, a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for an earnings surprise call.
Earnings ESP is our proprietary methodology for identifying stocks that have the best chances to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here’s how 4 major banks are expected to report:
Wells Fargo & Company (WFC)
This Zacks Rank #3 (Hold) banking giant is scheduled to kick-off the Q2 banking earnings season before the opening bell on Jul 11. This marks a change in the banking reporting schedule that usually starts with JPMorgan’s earnings release.
Zacks Consensus Estimate (earnings per share): $1.01
Zacks Consensus Estimate (revenue): $20.8 billion
Earnings ESP: 0.00%
We cannot conclusively say that Wells Fargo will beat the Zacks Consensus Estimate. Though the company’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise call.
JPMorgan Chase & Co.
This Zacks Rank #3 company is scheduled to release its Q2 results on Jul 15, before the opening bell.
Zacks Consensus Estimate (earnings per share): $1.30
Zacks Consensus Estimate (revenue): $23.7 billion
Earnings ESP: -1.54%
We are not confident about JPMorgan beating the Zacks Consensus Estimate in the upcoming release as it doesn’t have the right combination Zacks Rank and Earnings ESP.
Citigroup Inc.
Again a Zacks Rank #3 stock, this company is scheduled to release its Q2 earnings on Jul 14, before the opening bell.
Zacks Consensus Estimate (earnings per share): $1.09
Zacks Consensus Estimate (revenue): $18.8 billion
Earnings ESP: -3.67%
The combination of Zacks Rank and Earnings ESP doesn’t conclusively show that Citigroup will beat the Zacks Consensus Estimate.
Bank of America Corporation (BAC)
This Zacks Rank #3 company is scheduled to release its Q2 results before the opening bell on Jul 16.
Zacks Consensus Estimate (earnings per share): $0.29
Zacks Consensus Estimate (revenue): $21.6 billion
Earnings ESP: 0.00%
Here too, we are not confident of an earnings beat as Bank of America doesn’t have the right combination Zacks Rank and Earnings ESP.
Bottom Line
The expected disappointment from the earnings of forerunners signals weakness in the key banking sector. So, it’s perhaps a prudent idea to stay away from sector ahead of this earnings season. However, if the reality depicts something else with hidden strengths working in favor, one may reconsider banking on banks.
Keep an eye on our earnings preview and earnings report coverage in the coming days in the ‘Earnings Analysis’ section of www.zacks.com home page.
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