Bank Stocks Down On Weak Trading Revenue Expectations In Q2

All the major U.S. indices – S&P 500, the Dow Jones Industrial Average and NASDAQ – closed in red on Wednesday as the latest news from financial sector weighed on the investors’ mind. Notably, the KBW Nasdaq Bank Index declined 1.2% while the Financial Select Sector SPDR Fund XLF fell nearly 1%.

It all began with the top executives of JPMorgan Chase & Co. (NYSE:JPM) , Bank of America Corp. (NYSE:BAC) and Morgan Stanley (NYSE:MS) hinting at weakness in second quarter trading revenues. Shares of these companies declined in a 1.3–2.1% range. Shares of The Goldman Sachs Group, Inc. (NYSE:GS) , which is the most dependent on trading revenues among these, tanked almost 3.3%.

What Top Executives Warned Of?

At a Deutsche Bank (DE:DBKGn) investor conference, Marianne Lake, the chief financial officer at JPMorgan, stated that the company’s trading business for the first two months of second quarter was down roughly 15% year over year. Specifically, lower fixed income trading weighed on the overall trading income, while equities were up marginally.

Further, she said, “…as I look to June, I would say I don’t see any particular reason for that to change, particularly given the strength of our June last year, but anything can happen in a month.” Last year, volatility was significantly high amid ambiguity related to Brexit vote.

In a separate conference call, held by Sanford Bernstein, BofA’s chief executive Brian T. Moynihan warned the investors that the bank’s earnings in the second quarter will be hit by decline in trading income (down 10–12% from the prior-year quarter) along with lower-than-expected interest rates and the divestiture or shuttering of certain assets (these two factors are expected to reduce net interest income by $100–$110 million).

Nonetheless, the company’s trading revenues are still projected to be up 3–4% in the first half of 2017. This is mainly attributable to strong first-quarter trading results.

Moreover, BofA is expected to take a charge of $100 million as it closes/sells its data centers, which is expected to lead to cost savings, going forward.

Further, Morgan Stanley’s CEO James Gorman hinted that projections from JPMorgan and BofA reflect reality. In an interview with Bloomberg Television in Beijing, he said, “I don’t think we’re very different. We all have similar clients, if not the same clients.” Similarly, Goldman’s Co-President David Solomon did not provide any direct view about the trading scenario. But he did say, “...volatility and client activities, which were more subdued in the first quarter, have continued in comparable fashion in the second quarter.”

Near-End of the Bank Stock Rally

Last year’s trading results were quite unusual across the industry, with unexpected political developments in the U.S. and globally being the main drivers. The momentum continued in the first-quarter 2017 too.

While an improving economic backdrop and optimism surrounding the interest rate hike are supporting banks’ financials, uncertainty about Donald Trump's ability to deliver on proposed tax and banking sector reforms, and infrastructure spending have turned the investors apprehensive. With banks expected to be one of the biggest beneficiaries from these changes, this led to a significant reversal in the Trump-induced banking stock rally.

In the first two months of the second quarter, S&P 500 gained 1.8% while the Zacks categorized Major Regional Banks industry and the Zacks categorized Banks & Thrifts industry lost 1.4% and 4.6%, respectively.



Among the above-mentioned stocks, Morgan Stanley carries a Zacks Rank #2 (Buy), while JPMorgan, BofA and Goldman have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana. Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look. See the pot trades we're targeting>>

J P Morgan Chase & Co (JPM): Free Stock Analysis Report

Bank of America Corporation (BAC): Free Stock Analysis Report

Morgan Stanley (MS): Free Stock Analysis Report

Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report

SPDR-FINL SELS (XLF): ETF Research Reports

Original post

Zacks Investment Research