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Bank earnings: Expect a weak quarter as hopes for a "Trump Bump" fizzle
MARKETWATCH 3:00 PM ET 7/12/2017
Symbol Last Price Change
C 67.01down +0.19 (+0.28%)
WFC 54.96 -0.08 (-0.15%)
BAC 24.455 -0.145 (-0.59%)
MS 44.975down -0.505 (-1.11%)
GS 227.56 +0.61 (+0.27%)
QUOTES AS OF 03:09:35 PM ET 07/12/2017
J.P. Morgan, Citigroup(C) and Wells Fargo(WFC) will kick off the earnings season on Friday before the market open

Bank investors had good reason to cheer the results of the most recent Federal Reserve stress tests -- but second- quarter earnings may be more sobering.

Citigroup (C), J.P. Morgan(JPM), and Wells Fargo(WFC) will report their earnings before the market opens on Friday, kicking off what could be just the latest in a long string of disappointing earnings seasons stretching back to the financial crisis.

Read:Fed stress tests show banks could withstand a deep downturn (http://www.marketwatch.com/story/fed-stress-tests- show-banks-could-withstand-a-deep-downturn-2017-06-22)

"We see more misses than beats," wrote Jefferies analysts in a July 5 note. J.P. Morgan analysts agreed, writing last week "We expect moderate 2Q earnings."

Chris Whalen, a long-time bank analyst, expects earnings to come in soft enough that the stocks will trade off. " There's no real growth on the top line," he told MarketWatch. After several lean years, banks have run out of expenses to cut to boost the bottom line.

And most investors are finally starting to acknowledge that the hoped-for "reflation trade" isn't coming, Whalen said. "The Trump Bump is dead."

Hopes that the economy would be boosted by structural reforms, including tax reform, have faded as the administration of President Donald Trump has made little leeway on its plans. That has taken some of the shine off bank stocks.

"Our sense is that market participants are no longer incorporating excessively optimistic expectations of a scenario characterized by structural reform (notably tax reform), faster economic growth, higher short and long term interest rates, and substantial positive operating leverage into base case outlooks," analysts at UBS wrote Monday.

Read:Bets on regulatory relief for Wall Street banks are not going to pay off: analysts (http://www.marketwatch.com/ story/bets-on-regulatory-relief-for-wall-street-banks-are-not-going-to-pay-off-analysts-2017-06-09)

Here's a quick rundown of what analysts are expecting from the big banks:

Trading and investment banking:

J.P. Morgan analysts are expecting weaker revenues during the quarter, they wrote recently, but noted that volatility edged up slightly at the very end of the quarter, possibly enough to mitigate some of the declines throughout the rest of the quarter. Still, the team downgraded its earnings per share estimates for Bank of America(BAC) by three pennies and Citi by one, based on expected lower trading revenues. Bank of America(BAC) will report earnings early next week.

Read also: Bitcoin the new gold? Yes, says one Wall Street strategist who sees a 21-fold surge (http:// www.marketwatch.com/story/bitcoin-the-new-gold-yes-says-one-wall-street-strategist-who-sees-a-21-fold-surge-2017-07-09)

Whalen thinks investment banking activity will be "relatively muted." Somewhat stronger volumes in fixed income will be more than offset by a dry spell in issuance of equities, he said. J.P. Morgan agreed, writing that investment banking fees are likely to be "flattish" compared with a year ago.

Lending:

Analysts at Macquarie are forecasting about 1% increase in gross loans, they wrote, adding "patience for loan growth (is) beginning to run thin." With no growth in lending -- and higher operating expenses thanks in part to continued fallout from the scandal over its account practices -- the Macquarie team expects Wells Fargo(WFC) to be one of the biggest losers this quarter.

See:Banks are beginning to admit a new rule on revenue recognition will have an impact (http://www.marketwatch.com/ story/banks-are-beginning-to-admit-a-new-rule-on-revenue-recognition-will-have-an-impact-2017-07-07)

Mortgages:

The Mortgage Bankers Association had forecast origination volumes would increase 28% from the first quarter to the second, Jefferies analysts wrote in a note last week, in line with the normal seasonal bump from the spring selling season. But the Jefferies analysts are skeptical banks will see lending that strong. The MBA, Fannie Mae, and Freddie Mac all forecast that originations throughout 2017 will be about 20% lower than in 2016, largely because the refinance boom is finally over.

Earnings estimates for Friday's crop of reports are as follows:

Analysts polled by FactSet are expecting J.P. Morgan to report per-share earnings of $1.59, compared with $1.55 a year ago. Estimize, which crowdsources estimates from buy-side and sell-side analysts, academics and investors, is expecting EPS of $1.62.

J.P. Morgan is expected to report revenues of $25.03 billion, compared with $25.21 billion a year ago, according to FactSet analysts. Estimize is forecasting revenue of $25.1 billion.

Citigroup (C) is expected to report earnings per share of $1.21, down from $1.24 a year ago, according to FactSet. Estimize pegs the number at a higher $1.27.

Citigroup (C) is expected to report revenues of $17.43 billion, compared with $17.55 billion a year ago. Estimize is expecting revenue to come to $17.52 million.

Wells Fargo (WFC) is expected to report EPS of $1.01, the same as a year ago, according to FactSet. Estimize is expecting EPS of $1.03.

The bank is expected to post revenues of $22.49 billion, versus $22.16 in 2016, according to FactSet. Estimize is expecting revenue of $22.34 billion.

Stock price reaction: After rallying sharply following the November presidential election on expectations of an easing of post-crisis regulations, bank stocks have performed more in line with the market in 2017. The Financial Select Sector SPDR exchange-traded fund (XLF) has gained 6.7% in 2017, below the S&P 500's 9% gain.

Not all banks have performed equally, however. Citigroup(C) has gained the most of the big banks at 12.4%, followed by Bank of America(BAC) with a 11.3% gain. Morgan Stanley(MS) has gained 7.6% in 2017, while J.P. Morgan is up 7.6%. Wells Fargo(WFC) is flat for the year. The big loser is Goldman Sachs Group Inc.(GS) , which has lost 5.2% in the year so far. Goldman was a key gainer in the post-election rally.

The Dow Jones Industrial Average has gained 8.5%.

-Andrea Riquier; 415-439-6400; [e-mail]


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07-12-171500ET
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