Earnings Outlook: Bank earnings: Expect decent numbers but stocks may not break out of their doldrums

Top Stories


The fourth-quarter earnings season will kick off in earnest next week, starting Monday when Citigroup Inc.

C, +1.27%

 offers numbers from the first of the big U.S. banks.

JPMorgan Chase & Co.

JPM, -0.40%

and Wells Fargo & Co.

WFC, +0.32%

are scheduled to report on Tuesday, followed by Goldman Sachs Group Inc.

GS, +0.04%

 and Bank of America Corp.

BAC, +0.78%

 on Wednesday and Morgan Stanley

MS, +0.07%

 on Thursday.

Analysts are expecting a decent set of numbers, given an economy that seems in good shape based on holiday retail sales and employment numbers, subdued inflation and a more dovish Federal Reserve. But market volatility, political uncertainty and global tensions have created an uncertain backdrop that might prevent the numbers from finally lighting a fire under bank stocks, which have declined across the board for the past year.

“Compared with the challenges of Brexit and growth in EMEA, and the weakness in emerging markets, the U.S. is still experiencing a better economic and growth profile,” said Mark Doctoroff, co-head of MUFG’s Global Financial Institutions Group. “Risks to this continuing are obvious—prolonged government shutdown, credit weakness and deterioration in the borderline investment grade/non-investment grade universe, and haphazard market closure due to more extreme volatility.”

Analysts are expecting faster loan growth compared with recent quarters, based on Federal Reserve data, with commercial and industrial loans expected to lead the pack. Net interest margins (NIMs) are expected to benefit from higher short-term rates, while net interest income (NII) is expected to be boosted by the uptick in loan growth.

“Overall, we expect accelerating loan growth versus recent quarters, stable to slightly higher NIMs, low single digit quarter on quarter NII growth, stable credit quality, and challenging capital markets income,” UBS analysts led by Saul Martinez wrote in a note.

“Compared with the challenges of Brexit and growth in EMEA, and the weakness in emerging markets, the U.S. is still experiencing a better economic and growth profile.”


Mark Doctoroff, co-head, MUFG Global Financial Institutions Group

Jay Pestrichelli, co-founder of investment firm ZEGA Financial, who oversees $400 million in assets under management, agreed and said investment bank fees are expected to be lower given there were fewer equity and debt deals in the quarter.

U.S. equity underwriting volume fell 20% by deal value in the quarter from the year-earlier period, according to research and data firm Dealogic, and was down 25% by number of deals. Equity underwriting was down 40% from the third quarter by deal value and declined 26% measured by number of deals.

Debt underwriting volume fell 28% by deal value from the year earlier, Dealogic data shows, and was down 23% based on number of deals. Debt underwriting volume fell 21% from the third quarter by deal value and by 7% measured by number of deals.

But trading revenue should be higher given the high volatility and volume in the market at year-end, when stock and bond markets swung wildly against a backdrop of trade tensions with China, the threat—and then realization—of a government shutdown, mixed government data and concerns about the direction of interest rates.

“So much occurred in December and it was high volume at a time when we normally don’t have that,” he said. “For banks like Goldman and Morgan Stanley with big trading operations, we are expecting that everything got a lift. When they wrote their earnings expectations at the end of the third quarter, nobody was expecting December to do what it did.”

Read now: The stock market just got off to its best start in 13 years

Still, there are pockets of concern, not least of which is credit quality, said Pestrichelli. Spreads on high-yield, or “junk bonds”, or the risk premium that borrowers pay over risk-free government debt, widened to their highest level in more than two years recently, reflecting slack investor demand.

December was the first month since 2008 at the height of the financial crisis that not a single high-yield deal came to market, as The Wall Street Journal reported on Thursday. That drought reflects the concerns investors are feeling about market volatility, uncertainty about the economic outlook and the recent slide in oil prices. Energy companies are the most active issuers of junk-rated debt.

“Credit quality will definitely finds its way into press releases,” said Pestrichelli. “Banks like JPMorgan will want to alleviate concerns about liquidity.”

Read now: Where Gundlach sees risks, some on Wall Street size up junk bonds as ‘opportunity’

Investors will be keen for any clues as to what the big banks are expecting for 2019 and whether the sector is likely to break out of its slump. The SPDR S&P Bank ETF

KBE, +0.45%

 has fallen 21% in the last 12 months, while the Invesco KBW Bank ETF

KBWB, +0.52%

 has fallen 19%. The S&P 500

SPX, -0.11%

 and the Dow Jones Industrial Average

DJIA, -0.16%

 have declined 6% in the last 12 months.

MUFG’s Doctoroff noted there has been some significant M&A in the pharma space since the start of 2019, including Bristol-Myers Squibb Co.’s

BMY, +0.48%

 $74 billion takeover of Celgene Corp

CELG, +0.61%

 

“Capital markets still has a good pipeline, although some issuers are delaying issuance to deal with the market volatility,” he said.

Here’s what to expect from the big U.S. banks:

Citigroup earnings: Citigroup

C, +1.27%

 is expecting to report per-share earnings of $1.55, up from $1.14 in the year -earlier period, according to analysts polled by FactSet. Estimize, which crowdsources estimates from buy and sell-side analysts, academics, students and others, is expecting EPS of $1.60.

Revenue: Revenue is expected to rise to $17.562 billion from $17.012 billion a year ago, according to FactSet. Estimize pegs the number at $17.689 billion.

Share price: Citi shares have fallen 25% in the last 12 months, while the S&P 500 and the Dow Jones Industrial Average have declined 6.5%. Analysts polled by FactSet have an average overweight rating on the stock with an average stock price target of $74.47, or about 25% above its current price.

JPMorgan earnings: JPMorgan is expected to report EPS of $2.21, up from $1.76 a year ago, according to FactSet. Estimize pegs the number slightly higher at $2.23.

Revenue: JPMorgan is expected to report revenue of $26.902 billion, up from $25.450 billion a year ago, according to FactSet. Estimize is expecting revenue of $27.001 billion.

Share price: JPMorgan shares have fallen 10% in the last 12 months, but are up 1.8% in 2019 so far. Analysts polled by FactSet have an average rating of overweight, or buy, on the stock with an average stock price target of $117.48, or 16% above its current trading level.

Wells Fargo: Wells is expected to post EPS of $1.20, up from $1.16 a year ago, according to FactSet. Estimize is expecting EPS of $1.18.

Revenue: The San Francisco-based lender is expected to post revenue of $21.751 billion, down from $22.050 billion a year ago, according to FactSet. Estimize is expecting $21.580 billion in revenue.

Stock price: Wells Fargo shares have fallen 25% in the last 12 months, but are up 3.1% in 2019 so far. Analysts polled by FactSet have an average overweight rating on the stock with an average stock price target of $58.78, or about 20% above its current price.

Goldman Sachs earnings: Goldman is expected to report EPS of $4.43, down from $5.68 a year ago, according to FactSet. Estimize is forecasting EPS of $5.84.

Revenue: Goldman is expected to post revenue of $7.586 billion, down from $7.834 billion a year ago, according to FactSet. Estimize is expecting revenue to come in at $8.152 billion.

Stock price: Goldman stock has fallen 32% in the last 12 months, making it the worst performer among the big banks. But FactSet analysts have an average overweight rating on the stock and a $230.15 price target, which is about 24% above its current trading level.

Bank of America earnings: Bank of America is expected to report EPS of 63 cents, up from 47 cents a year ago, according to FactSet. Estimize is expecting 65 cents.

Revenue: Bank of America is expected to report revenue of $22.362 billion, up from $20.400 billion a year ago, according to FactSet. Estimize is expecting $22.467 billion of revenue.

Stock price: The stock has fallen 16% in the last 12 months, and is up 4% in 2019 so far. Analysts on FactSet rate the stock as overweight, with an average stock price target of $31.79, or about 24% above its current price.

Morgan Stanley earnings: Morgan Stanley is expected to post EPS of 90 cents, up from 81 cents a year ago, according to FactSet. Estimize has the number pegged at 91 cents.

Revenue: Morgan Stanley is expected to post revenue of $9.346 billion, up from $9.021 billion a year ago. Estimize is expecting $9.413 billion in revenue.

Stock price: Morgan Stanley shares have fallen 24% in the last 12 months, but are up 4% in 2019 so far. Analysts polled by FactSet also rate that stock as overweight with an average stock price target of $52.73, or 27% above its current trading level.

Ciara Linnane is MarketWatch’s investing- and corporate-news editor. She is based in New York.

We Want to
Hear from You

Join the conversation



Leave a Reply

Your email address will not be published. Required fields are marked *