Bank ETFs Muted After Earnings: Should You Buy?

The financial sector, which accounts for around one-fifth of the S&P 500 index, is now busy with Q1 earnings releases. The going is great so far, with five big banks crushing estimates on both lines and one reporting mixed results. The backdrop should favor the banks along with the course of oil, the stance of the Fed and proposed policies of Trump.

However, the restrained benchmark U.S. Treasury yields since mid-March, thanks to geopolitical risks and the tech space crash, is a concern for the banking sector. Let’s take a look at major banking earnings in detail:

Big Bank Earnings in Focus

JP Morgan (NYSE:JPM) reported earnings of $2.37 per share, beating the Zacks Consensus Estimate of $2.28 in the first quarter of 2018. Also, the figure reflected a 44% rise from the year-ago period.

Net revenues as reported were $27.9 billion in the quarter, up 12% from the year-ago quarter. Also, it topped the Zacks Consensus Estimate of $27.8 billion. Rising rates, loan growth and increase in trading revenues were the main reasons for the improvement. These were partially offset by lower investment banking revenues.

Wells Fargo (NYSE:WFC) earned $1.12 per share in Q1, beating the Zacks Consensus Estimate of $1.07 and improving from the prior-year quarter earnings of $1.03. The quarter’s total revenues were $21.9 billion, outpacing the Zacks Consensus Estimate of $21.7 billion. However, the figure compared unfavorably with the prior-year quarter’s tally of $22.3 billion.

Wells Fargo appeared to have failed to benefit much from higher interest rates as rival JPMorgan did. Wells Fargo’s net interest margin was flat with the preceding quarter and down from the year-earlier level.

Citigroup Inc.’s (NYSE:C) earnings per share of $1.68 for Q1 were ahead of the Zacks Consensus Estimate of $1.61 and the year-ago figure of $1.35 per share. Revenues were up 3% year over year to $18.9 billion in the reported quarter. The revenue figure came in line with the Zacks Consensus Estimate. Citi’s FICC revenues were down 7% in Q1.

Bank of America Corporation (NYSE:BAC)’s (NYSE:C) first-quarter 2018 earnings of 62 cents per share surpassed the Zacks Consensus Estimate of 59 cents. Also, the figure was 38% higher than the prior-year quarter number. Net revenues came in at $23.1 billion, up 4% from the prior-year quarter and ahead of the Zacks Consensus Estimate of $22.9 billion.

Thanks to strong fixed income trading revenues, Goldman Sachs’ (NYSE:GS) first-quarter 2018 results recorded a positive earnings surprise of 22.6%. The company reported earnings per share of $6.95, breezing past the Zacks Consensus Estimate of $5.67. Further, the bottom line witnessed 35% year-over-year improvement. Goldman’s net revenues were up 25% year over year to $10 billion in the quarter under review. The figure handily outpaced the Zacks Consensus Estimate of $8.9 billion.

Morgan Stanley’s (NYSE:MS) first-quarter 2018 earnings from continuing operations of $1.45 per share beat the Zacks Consensus Estimate of $1.28. The reported figure was 45% above the prior-year quarter. Net revenues amounted to $11.1 billion, reflecting a rise of 14% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $10.5 billion. FICC trading sales rose 12% during the quarter.

Market Impact

Investors, who have still their hopes pinned on a decent earnings season, Trump’s promises for deregulation and faster Fed policy tightening, must be keen on knowing how financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, PowerShares KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH responded to the earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Goldman and Morgan Stanley are not that prominent in the afore-mentioned ETFs, rather these are heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (WA:IAI) .

ETF Performance

Most of these ETFs gave downbeat to decent performances in the last five days (as of April 17, 2018), in the peak of banking earnings releases. IAI gained 1.3% thanks to Goldman’s blockbuster earnings, IYF was up only 0.03% but VFH, IYG, XLF and KBWB lost in the range of 0.54% to 1.9%.

Downbeat investors’ mood following Wells Fargo and Citi’s earnings have probably kept the whole sector from shooting higher. Goldman Sachs shares suffered for “halting buybacks”. However, Morgan Stanley’s blockbuster performance at the end should charge up the space ahead (read: Will Bank ETFs Sizzle on Fed & Trump Influenced Q1 Earnings?).

Overall, the finance sector’s earnings are expected to be up 22.6%, as per the Earnings Trends issued on Apr 13, 2018. Among this, big banks are expected to log a 19.2% expansion in Q1. So, one can easily forget Wells Fargo and Citi woes and bet on the prospects of the sector, tax reform and deregulations with the financial ETFs in focus (read: Welcome Powell Era With These ETFs).

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