A day before the first-quarter earnings season for U.S. banks kicks off, let’s look back at the January-March happenings in the industry. After a troubled year that showed little hope for recovery in 2015 as the Fed sounded determined to hike interest rates with the economy moving along steadily, will banks show up an encouraging start to 2015?
While there were a number of favorable factors, lingering issues – in particular the industry’s structural pressure and high legal costs – appear to have kept the usual hold.
Fundamentally, demand for fresh mortgages remained depressed with fluctuations in mortgage rates and significantly lower refinancing activity. Also, there were fewer avenues for new originations. The concerns over sharply lower oil prices and a strong dollar that serve to dampen economic growth might have also kept demand for loans subdued.
The oil price slump has been a headwind for lenders exposed to energy firms that are fraught with severe credit issues. The results of the concerned banks may show some scratches made by energy lending in Q1.
Wobbly trading activity, which was a downside last year too, is likely to remain a drag on revenues. In fact, though trading volumes may expand, this will have little effect on revenues thanks to customers’ increasing preference of electronic trading to save charges.
Growth in advisory and underwriting revenues, which was a major driving force in 2014 owing to an M&A boom, is likely to lose some strength sequentially in Q1 due to lower deal closures. But the quarter is expected to witness solid year-over-year growth in advisory fees with the return of volatility in global financial markets.
While weak deal activity in Europe, the Asia Pacific and Japan hurt global investment banking fees in the quarter, the biggest U.S. investment banks seem to have dodged the weakness and remained significantly profitable in this area.
Further, a superior performance by the asset management business and continued cost containment through reorganization were also among the quarter’s positives.
As the overall scenario doesn’t look really gloomy, we don’t expect too many banks to miss earnings estimates. Also, the concerns surrounding the industry have already led to downward estimate revisions by the analysts, increasing the chances of an earnings beat.
Considering the S&P 500 universe, the broader Finance sector, of which U.S. banks are part, is expected to witness a 9.2% year-over-year growth in earnings. This compares favorably with a 1.1% decline last quarter.
Key Concerns
- Mortgage banking might see weakness due to depressed demand for fresh mortgages and lesser avenues for new originations
- Depressed loan demand as cheap oil price and strong dollar dampen economic growth
- Persistent pressure on net interest margins with persistent low interest rate environment
- High legal and restructuring costs with increased regulatory scrutiny on the business model
- Weak energy lending due to the oil price disaster
Key Positives
- FICC (fixed income, currencies & commodities), in particular the currency trading desks, should do better on the back of increased market volatility and foreign exchange rates
- Investment banking revenues should witness a solid year-over-year improvement supported by the return of volatility in global financial markets
- Aggressive cost control through streamlined operations and job cuts should keep contributing to the bottom line
- A favorable asset market backdrop and improved macroeconomic factors are likely to have lent support to the financials
What to Expect from the Frontrunners?
Based on our proven model, the chance of an earnings beat is high for a number of industry leaders this time around. According to the 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 chance 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 are the expected numbers from four major banks reporting this week:
JPMorgan Chase & Co (NYSE:JPM)
This Zacks Rank #3 banking giant is scheduled to set the Q1 banking earnings season rolling before the opening bell on Apr 14.
- Zacks Consensus Estimate (earnings per share): $1.39 (versus $1.28 reported in Q1 2014)
- Zacks Consensus Estimate (revenues): $24.3 billion (versus $24.7 billion reported in Q1 2014)
- Earnings ESP: +0.72%
So JPMorgan is likely to beat the Zacks Consensus Estimate as it has the favorable combination of Earnings ESP and Zacks Rank.
Wells Fargo & Company (NYSE:WFC) (WFC - Analyst Report)
This Zacks Rank #3 company will also release Q1 results with JPMorgan on Apr 14, before the opening bell.
- Zacks Consensus Estimate (earnings per share): 98 cents (versus $1.05 in Q1 2014)
- Zacks Consensus Estimate (revenue): $21.1 billion (versus $20.4 billion in Q4 2014)
- Earnings ESP: 0.00%
We can’t conclusively predict an earnings beat for Wells Fargo as it doesn’t have the right combination of the two key ingredients.
Citigroup Inc (NYSE:C). (C - Analyst Report)
This banking bellwether, which currently carries a Zacks Rank #2 (Buy), is scheduled to release its Q1 earnings before the opening bell on Apr 15.
- Zacks Consensus Estimate (earnings per share): $1.40 (versus $1.30 in Q1 2014)
- Zacks Consensus Estimate (revenues): $20 billion (versus $19.9 billion in Q1 2014)
- Earnings ESP: 0.00%
While Citigroup’s current Zacks Rank increases the predictive power, an Earnings ESP of 0.00% lessens the chance of an earnings beat.
Bank of America Corp (NYSE:BAC). (BAC - Analyst Report)
This Zacks Rank #4 (Sell) company will also release Q1 earnings with Citigroup on Apr 15, before the opening bell.
- Zacks Consensus Estimate (earnings per share): 29 cents (versus a loss of 5 cents in Q1 2014)
- Zacks Consensus Estimate (revenues): $21.5 billion (versus $22.4 billion reported in Q1 2014)
- Earnings ESP: 0.00%
We are not confident of an earnings beat for Bank of America either.
Bottom Line
While the releases in the next couple of days will reveal how the quarter fared for the industry, the overall expectations remain on the optimistic side. So, it is advisable for investors with a strong preference for banking stocks to consider betting on those with a favorable combination ahead of their earnings releases.