Market Unimpressed with Bank Earnings

      No Comments on Market Unimpressed with Bank Earnings

It isn’t hard to appreciate the market’s negative reaction to the Wells Fargo (WFC Free Report) and Citigroup (C Free Report) reports, but the lukewarm reaction to JPMorgan (JPM Free Report) report is likely reflective of continued weak sentiment for the group.

The fact is that JPMorgan’s report represented all around strength and offers useful read-throughs for what to expect from pure-play investment banks, trust banks and regional operators in the coming days. We have a busy reporting docket this week, with more than 170 companies coming out with quarterly results, including 60 S&P 500 members.  

As you can see in the year-to-date performance comparison of Citi, JPMorgan, and Wells Fargo shares relative to the S&P 500 index (orange line), the banks have lagged the broader market, with Citi and Wells doing real bad.

As discussed in this space last week, a big contributor to the group’s recent underperformance is the flattening yield curve. Lately, yield spreads have compressed significantly as the shorter end of the curve has gained ground in response to the market’s Fed expectations while long-term yields have been held down by lack of inflation expectations and safe-haven flows around the trade uncertainty.  
 
With respect to the actual results, there is plenty to like in the JPMorgan report while Citi’s results were modestly disappointing and Wells’ report was weak as well as ‘noisy’. JPMorgan’s loan portfolio increased a respectable +4% from the same period last year and +2% from the preceding period. Earnings at the bank’s investment banking unit increased +18% from the year-earlier period, with trading revenues increasing +13%. The one area of weakness was the mortgage unit, with mortgage volume down -10% and revenues down -6% from the year-earlier period.

Mortgages are a much bigger deal with Wells Fargo, with earnings in the bank’s mortgage unit down by almost a third from the same period last year and the overall loan portfolio down -1.4% from the earlier period. The bank had a number of ‘charges’ in its report as well, though we don’t exclude these charges from the bank’s ‘recurring’ earnings as these charges have effectively become a regular part of its results as it continues to put the September 2016 scandal behind it. The combination of increased outlays for regulatory and compliance strictures and weakness in the mortgage business resulted in -2.5% lower earnings on -2.8% reduction in revenues.

The Citi disappointment is centered primarily on weakness in trading and credit cards, with trading revenues down -1% from the year-earlier period even though management had guided towards a flat showing on this count. The bank’s loan portfolio was up +4% while expenses were flat from the year-earlier period. Thanks to lower taxes, Citi’s Q2 earnings were up +16.2% from the same period last year on +3.2% higher revenues.

Finance Sector Scorecard (as of Friday, July 13th)

We now have Q2 results from 4 of the 99 Finance sector companies in the S&P 500 index. Keep in mind however that these 4 companies account for 21.3% of the sector’s total market capitalization in the index.

Total earnings for these 4 Finance companies are up +11.4% from the same period last year on +3.6% higher revenue growth, with 75% beating EPS estimates and 100% beating revenue estimates. The comparison charts below put the results thus far in a historical context.

As you can see in the chart above, the sector’s growth picture is tracking above the 4- and 12-quarter averages, but below what we had seen from these stocks in the preceding quarter. These comparisons will likely change as Bank of America (BAC Free Report) , Goldman Sachs (GS Free Report) and Morgan Stanley (MS Free Report) report quarterly results next week.

For the quarter as a whole, total Finance sector earnings are expected to be up +21% from the same period last year on +3.6% higher revenues. This would follow +25.1% earnings growth in 2018 Q1 on +4.8% higher revenues.

The table below shows the sector’s Q2 earnings expectations at the medium industry level. We show Q2 expectations in the context of what was actually reported in the preceding three quarters and what is expected in the following four periods at the medium-industry level.

The chart below shows the same data at the aggregate sector level. The strong earnings growth of the first half of 2018 is expected to continue in the back half as well.

Please note that the sector’s strong growth this year is for the most part to thanks to the tax legislation. You can see that in the above chart by focusing on the revenue growth pace (orange bars). Revenue growth for the group is positive, but nothing to get overly excited about.

Q2 Earnings Season Scorecard (as of July 13th, 2018)

We now have Q2 results from 27 S&P 500 members, with total earnings for these 27 companies up +19.1% from the same period last year on +9.7% higher revenues, with 88.9% of the companies beating EPS and revenue estimates.

We probably shouldn’t draw any firm conclusions from the results thus far, but this is nevertheless a good start to the Q2 reporting cycle, as the comparison charts below show.

The way to read these charts is that Q2 earnings and revenue growth (left-hand chart) for these 27 index members is above the 4- and 12-qurater averages, but the comparison to the preceding period (2018 Q1) is mixed, with earnings growth (+19.1%) tracking below and revenue growth (+9.7%) inline.
 

Overall Expectations for 2018 Q2

Looking at Q2 as a whole, combining the actual results from the 27 index members with estimates from the still-to-come 473 companies, total earnings are expected to be up +19.5% from the same period last year on +8.2% higher revenues, with double-digit earnings growth for 11 of the 16 Zacks sectors. This would follow +24.6% earnings growth in 2018 Q1 on +8.7% revenue growth, the highest growth in almost 7 years.

The table below shows the summary picture for Q2, contrasted with what was actually achieved in Q1.

The chart below of weekly reporting calendar for the S&P 500 index shows that we will be in a good position to gauge trends by the end of this week, as we will have seen results from 87 index members by then.

The Earnings Growth Peak

The chart below compares current Q2 earnings growth expectations with what was actually achieved in the preceding 5 quarters and what is expected in the following 4 quarters.

When market commentators talk about earnings growth peak, it is the growth comparison in this chart they are referring to. Looking at this chart, it is obvious that growth has peaked already, with the pace decelerating going forward.

We should keep in mind however that actual results typically come in better than expected, with actuals exceeding estimates in the 3% to 5% range. This means that the 19.5% growth pace currently expected in Q2 will likely be closer to the 2018 Q1 tally when all is said and done.

The chart below shows the growth pace on trailing 4-quarter basis, which tends to smooth out the quarter-to-quarter jumps.

The two charts above provide different answers to the ‘peak earnings’ question. The first chart shows that the growth rate likely peaked in 2018 Q1, while second chart shows the expected to ‘peak’ to arrive in the last quarter of the year.

We should keep in mind that this earnings cycle got underway back in 2009 when the U.S. economy got out of its last recession. By this time, earnings growth should have come down to the historical ‘normalized’ pace in the mid-single digits level. The reason we have these impressive growth numbers is thanks mostly to the effect of the tax cuts, which will start wearing off towards the end of 2019.

In other words, earnings likely haven’t peaked yet. But with this cycle so long in tooth, we are steadily moving towards that stage.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it’s predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce “the world’s first trillionaires,” but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks’ 3 Best Stocks to Play This Trend >>

Here is a list of the 172 companies including 60 S&P 500 and reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
BANK OF AMER CPBAC0.630.465.08%MondayBTO
BLACKROCK INCBLK6.65.244.52%MondayBTO
HUNT (JB) TRANSJBHT1.280.88-1.83%MondayBTO
SUPERCOM LTDSPCB-0.050.01N/AMondayBTO
NETFLIX INCNFLX0.80.151.59%MondayAMC
AVID BIOSERVICSCDMO-0.15-0.16-64.29%MondayAMC
FIRST DEFIANCEFDEF1.020.8217.35%MondayAMC
SANDVIK ABSDVKY0.260.242.11%TuesdayN/A
OMNICOM GRPOMC1.551.48.57%TuesdayBTO
PROLOGIS INCPLD0.710.848.11%TuesdayBTO
COMERICA INCCMA1.651.15-1.28%TuesdayBTO
SCHWAB(CHAS)SCHW0.580.391.85%TuesdayBTO
JOHNSON & JOHNSJNJ2.061.832.49%TuesdayBTO
GOLDMAN SACHSGS4.673.9522.57%TuesdayBTO
UNITEDHEALTH GPUNH3.032.464.11%TuesdayBTO
PROGRESSIVE CORPGR1.070.593.39%TuesdayBTO
FIRST HRZN NATLFHN0.360.2713.33%TuesdayBTO
MERCANTILE BANKMBWM0.570.4517.86%TuesdayBTO
NEOGEN CORPNEOG0.30.2433.33%TuesdayBTO
NATIONSTAR MTGENSM0.520.4310.00%TuesdayBTO
TELENOR ASA-ADSTELNYN/A0.27N/ATuesdayBTO
UNITED CONT HLDUAL3.072.752.04%TuesdayAMC
CSX CORPCSX0.860.6418.18%TuesdayAMC
ADTRAN INCADTN-0.290.27-68.42%TuesdayAMC
LEGACY TX FINLLTXB0.660.59-27.78%TuesdayAMC
FNF GROUPFNF0.830.750.00%TuesdayAMC
RENASANT CORPRNST0.740.611.45%TuesdayAMC
WINTRUST FINLWTFC1.441.118.53%TuesdayAMC
HANCOCK HLDG COHWC0.940.680.00%TuesdayAMC
FULTON FINLFULT0.130.26-3.45%TuesdayAMC
HOPE BANCORPHOPE0.370.30.00%TuesdayAMC
PINNACLE FIN PTPNFP1.140.843.67%TuesdayAMC
MARTEN TRANSMRTN0.220.170.00%TuesdayAMC
AMER MOVIL-ADRAMX0.160.23-42.00%TuesdayAMC
INTERACTIVE BRKIBKR0.460.3212.50%TuesdayAMC
UTD COMM FIN CPUCFC0.190.160.00%TuesdayAMC
UNITED FIN BCPUBNK0.290.327.14%TuesdayAMC
MELLANOX TECHMLNX0.790.132.08%TuesdayAMC
Kinder MorganKMI0.190.144.76%WednesdayN/A
AKZO NOBEL NVAKZOYN/A0.4916.13%WednesdayN/A
US BANCORPUSB1.010.851.06%WednesdayBTO
ABBOTT LABSABT0.710.621.72%WednesdayBTO
GRAINGER W WGWW3.772.7422.58%WednesdayBTO
NORTHERN TRUSTNTRS1.631.1813.38%WednesdayBTO
TEXTRON INCTXT0.70.656.52%WednesdayBTO
MORGAN STANLEYMS1.080.8713.28%WednesdayBTO
M&T BANK CORPMTB3.172.387.30%WednesdayBTO
UNION BANKSHARSUBSH0.620.469.26%WednesdayBTO
AB ELECTROLUXELUXYN/A1.03N/AWednesdayBTO
ERICSSON LM ADRERIC0.020.02133.33%WednesdayBTO
NOVARTIS AG-ADRNVS1.281.212.40%WednesdayBTO
ASML HOLDING NVASML1.441.0812.32%WednesdayBTO
MGIC INVSTMT CPMTG0.350.318.57%WednesdayBTO
EBAY INCEBAY0.390.34-6.82%WednesdayAMC
AMER EXPRESS COAXP1.831.478.77%WednesdayAMC
SL GREEN REALTYSLG1.681.780.61%WednesdayAMC
INTL BUS MACHIBM3.032.972.08%WednesdayAMC
CROWN CASTLECCI1.271.27.94%WednesdayAMC
UTD RENTALS INCURI3.52.3720.59%WednesdayAMC
CDN PAC RLWYCP2.42.06-1.39%WednesdayAMC
PTC INCPTC0.20.1425.00%WednesdayAMC
CROWN HLDGS INCCCK1.581.1217.50%WednesdayAMC
CVB FINLCVBF0.310.263.23%WednesdayAMC
PREFERRED BANKPFBC1.090.81.87%WednesdayAMC
BADGER METERBMI0.40.36-33.33%WednesdayAMC
STEWART INFO SVSTCN/A0.79-35.21%WednesdayAMC
UNIVL FST PRODSUFPI0.750.557.14%WednesdayAMC
TEXAS CAP BCSHSTCBI1.380.970.73%WednesdayAMC
UMPQUA HLDGS CPUMPQ0.340.2625.00%WednesdayAMC
ALCOA CORPAA1.350.6228.33%WednesdayAMC
CATHAY GENL BCPCATY0.90.64-1.27%WednesdayAMC
TRISTATE CP HLDTSC0.370.295.88%WednesdayAMC
BERKSHIRE HILLSBHLB0.70.581.56%WednesdayAMC
BOSTON PRIV FINBPFH0.230.2713.64%WednesdayAMC
PLEXUS CORPPLXS0.820.74-1.33%WednesdayAMC
EAGLE BCP INCEGBN1.060.810.97%WednesdayAMC
RESOURCES CNCTNRECN0.280.220.00%WednesdayAMC
CONSOL TOMOKACTO1.180.67-21.81%WednesdayAMC
GREAT SOUTH BCPGSBC0.921.149.20%WednesdayAMC
RLI CORPRLI0.530.6115.38%WednesdayAMC
BANCORPSOUTH BKBXS0.550.428.00%WednesdayAMC
NOODLES & CONDLS0.030.01-100.00%WednesdayAMC
TRIUMPH BANCORPTBK0.520.51-5.45%WednesdayAMC
COHEN&STRS INCCNS0.620.51.64%WednesdayAMC
ADVA OPTICALADVOF0.10.1-185.71%ThursdayN/A
DOVER CORPDOV1.211.042.65%ThursdayBTO
SNAP-ON INCSNA2.952.62.20%ThursdayBTO
BB&T CORPBBT1.010.785.43%ThursdayBTO
KEYCORP NEWKEY0.420.340.00%ThursdayBTO
FIFTH THIRD BKFITB0.570.4618.75%ThursdayBTO
PPG INDS INCPPG1.891.83-1.42%ThursdayBTO
UNION PAC CORPUNP1.931.451.82%ThursdayBTO
DANAHER CORPDHR1.090.995.32%ThursdayBTO
PHILIP MORRISPM1.231.1413.64%ThursdayBTO
TRAVELERS COSTRV2.441.92-8.21%ThursdayBTO
BANK OF NY MELLBK1.030.9213.40%ThursdayBTO
ALLIANCE DATAADS4.363.583.02%ThursdayBTO
GENUINE PARTSGPC1.561.29-3.79%ThursdayBTO
NUCOR CORPNUE2.1216.36%ThursdayBTO
VOLVO AB-BVLVLY0.360.333.03%ThursdayBTO
SONOCO PRODUCTSSON0.860.712.78%ThursdayBTO
COUNTY BANCORPICBK0.540.2911.54%ThursdayBTO
WEBSTER FINL CPWBS0.870.647.59%ThursdayBTO
WABCO HOLDINGSWBC1.91.697.65%ThursdayBTO
BLACKSTONE GRPBX0.70.5941.30%ThursdayBTO
DOMINOS PIZZADPZ1.761.3212.99%ThursdayBTO
RPM INTL INCRPM1.181.0216.67%ThursdayBTO
ROGERS COMM CLBRCI0.810.7418.33%ThursdayBTO
TILE SHOP HLDGSTTS0.090.1514.29%ThursdayBTO
S&T BANCORP INCSTBA0.60.657.14%ThursdayBTO
ABB LTD-ADRABB0.360.30.00%ThursdayBTO
SANDY SPRINGSASR0.80.616.67%ThursdayBTO
SAP SESAP0.980.7643.86%ThursdayBTO
SCHOLASTIC CORPSCHL1.391.3114.29%ThursdayBTO
TAIWAN SEMI-ADRTSM0.450.42-1.67%ThursdayBTO
UNILEVER PLCULN/AN/AN/AThursdayBTO
UNILEVER N VUNN/AN/AN/AThursdayBTO
EAST WEST BCEWBC1.090.8113.00%ThursdayBTO
GATX CORPGATX0.921.3269.23%ThursdayBTO
HOME BANCSHARESHOMB0.440.352.44%ThursdayBTO
POOL CORPPOOL2.842.217.14%ThursdayBTO
COMP TASKCTG0.080.060.00%ThursdayBTO
WNS HLDGS-ADRWNS0.40.3723.91%ThursdayBTO
SYNTEL INCSYNT0.440.4425.00%ThursdayBTO
CHART INDUSTRIEGTLS0.450.2121.05%ThursdayBTO
MICROSOFT CORPMSFT1.070.9811.76%ThursdayAMC
CAPITAL ONE FINCOF2.621.9613.25%ThursdayAMC
E TRADE FINL CPETFC0.890.5211.39%ThursdayAMC
CINTAS CORPCTAS1.651.1810.48%ThursdayAMC
PEOPLES UTD FINPBCT0.320.240.00%ThursdayAMC
SKYWORKS SOLUTNSWKS1.41.462.74%ThursdayAMC
INTUITIVE SURGISRG2.021.6847.88%ThursdayAMC
BRANDYWINE RTBDN0.340.340.00%ThursdayAMC
MB FINANCL INCMBFI0.680.541.59%ThursdayAMC
SKECHERS USA-ASKX0.40.380.00%ThursdayAMC
FIRST FIN BC-OHFFBC0.510.3713.04%ThursdayAMC
EXPONENT INCEXPO0.30.25-1.61%ThursdayAMC
EQUITY BANCSHRSEQBKN/A0.51-4.08%ThursdayAMC
SERVISFIRST BCSSFBS0.580.453.45%ThursdayAMC
EASTGROUP PPTYSEGP1.121.055.45%ThursdayAMC
WESTERN ALLIANCWAL0.980.763.23%ThursdayAMC
GLACIER BANCORPGBCI0.530.43-7.69%ThursdayAMC
LIMELIGHT NETWKLLNW00300.00%ThursdayAMC
NORTHWESTERN CPNWE0.440.47-1.67%ThursdayAMC
ENTEGRA FINL CPENFC0.520.366.00%ThursdayAMC
SB FINANCIAL GPSBFG0.380.3712.90%ThursdayAMC
ASSOC BANC CORPASB0.480.3621.95%ThursdayAMC
CELANESE CP-ACE2.371.7918.22%ThursdayAMC
QCR HLDGS INCQCRH0.790.655.63%ThursdayAMC
SEI INVESTMENTSSEIC0.750.5711.69%ThursdayAMC
INDEP BK MASSINDB1.110.82-2.91%ThursdayAMC
STORA ENSO -ADRSEOAYN/A0.2133.33%FridayN/A
GENL ELECTRICGE0.180.2845.45%FridayBTO
BAKER HUGHES GEBHGE0.14-0.1150.00%FridayBTO
KANSAS CITY SOUKSU1.521.33-3.70%FridayBTO
REGIONS FINL CPRF0.330.2512.90%FridayBTO
SUNTRUST BKSSTI1.31.0316.22%FridayBTO
SCHLUMBERGER LTSLB0.430.350.00%FridayBTO
CITIZENS FIN GPCFG0.860.632.63%FridayBTO
STATE ST CORPSTT2.011.672.53%FridayBTO
STANLEY B&D INCSWK2.032.012.96%FridayBTO
HONEYWELL INTLHON21.83.17%FridayBTO
V F CORPVFC0.330.293.08%FridayBTO
BANCO LATINOAMEBLX0.570.44-15.52%FridayBTO
GENTEX CORPGNTX0.410.310.00%FridayBTO
MANPOWER INC WIMAN2.351.824.24%FridayBTO
IBERIABANK CORPIBKC1.591.1-3.52%FridayBTO
WIPRO LTD-ADRWIT0.060.07-14.29%FridayBTO
OFG BANCORPOFG0.250.345.00%FridayBTO
SENSIENT TECHSXT0.920.87-1.11%FridayBTO
CLEVELAND-CLIFFCLF0.540.2661.90%FridayBTO
CEMENTOS PACASMCPACN/A0.0837.50%FridayAMC

Leave a Reply

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

This site uses Akismet to reduce spam. Learn how your comment data is processed.