Earnings Outlook: Bank earnings ahead after a weak quarter for stocks, but the biggest names remain favored

by | Oct 7, 2023 | Stock Market

Profit updates from the U.S.’s largest banks are expected to fare better than their stock price weakness would suggest when the third-quarter corporate earnings reporting season kicks off this coming Friday. JPMorgan Chase & Co.
Wells Fargo & Co.
and Citigroup
provide their quarterly updates on Friday, followed by Bank of America Corp.
and Goldman Sachs
on Oct. 17 and Morgan Stanley
on Oct. 18.

Among the group, Citibank’s stock fell the most in the third quarter, with a loss of 10.7%. At the same time, its earnings target among Wall Street analysts has only fallen by 6%. While stock prices and changes to analysts’ earnings expectation aren’t directly correlated, the current dynamic reflects the bearish sentiment toward banks all year. Clouds hanging over the sector include increased capital requirements to meet regulatory guidelines and concerns over higher bond yields impacting the prices of debt and other securities on bank balance sheets. Also read: Why bank stocks are the ‘Achilles’ heel’ of markets as bears worry high bond yields may ‘break’ something Other worries include potential drops in net interest income, which is the profit banks make on loans compared to what they pay out in interest for deposits. Banks are also facing jitters over commercial real estate values as office workers stay at home and demand for workspace dwindles. Meanwhile, banks are also adding to their reserves in anticipation of an economic downturn in a move that channels money away from their quarterly bottom lines. Also read: Bank stocks outpace broad market into the red as higher bond yields impact the value of their portfolios Larger banks have fared better in the current environment than their smaller peers, however. With exposure to more revenue streams, such as credit cards, the megabanks should remain healthier than their weak stock prices of late would suggest, said Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds a position in JPMorgan Chase. “Bigger is better in this earnings season,” Mulberry said. “Banks that are big enough to have diversified businesses seem to be doing well.” Of the six megabanks, Wells Fargo and JPMorgan Chase have seen their earnings estimates from Wall Street analysts increase during the quarter, according to FactSet data. Expectations for Bank of America have remained about flat and estimates have fallen for Citigroup, Goldman Sachs and Morgan Stanley. Higher interest rates and a spike in bond yields this week have weighed heavily on bank stocks and pressured the profits they make on loans compared to what they spend to maintain deposits in the form of interest payments. A spike in bond yields in recent days on fresh uncertainties on the geopolitical front took a bite out of bank stocks earlier this week, but was then countered by a stronger-than-expected September jobs report on Friday, which sparked some gains in the sector. While deal-making potentially bottomed in the second quarter or early in the third quarter, it didn’t take off significantly in recent months either. This will weigh on earnings in the investment-banking sector, which includes advising on mergers and acquisitions, raising capital for corporate customers and underwriting initial public offerings, among other deal types. “The third quarter was another weak quarter for dealmaking in the U.S. as the threat of further rate rises persisted and we saw the usual summer slowdown in the months of July and August,” Phil Isom, global head of M&A and KPMG, said in a statement. Meanwhile, bank stocks look cheap at the moment. Financial stocks are currently trading at 87% of their 10-year average price-to-earnings ratio, according to data compiled by MarketWatch Deep Dive columnist Philip van Doorn. Also read: Here’s what to expect when banks report earnings, and how cheap their stocks are now Bank analyst Vivek Juneja of J.P. Morgan Chase said t …

Article Attribution | Read More at Article Source

Share This