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Will Financial ETFs Forget Brexit and Gain on Decent Q2 Earnings?
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The financial sector, which accounts for around one-fifth of the S&P 500 index, had a decent Q2. Some big banks came up with mixed results with a focus on bottom line beat while some others managed to beat on both lines.
Operating Backdrop
Global growth worries that led to lower demand for loans, weakness in equity trading revenues and lower investment banking fees acted against the space. Plus, risk-off trade sentiments amid global economic concerns and Brexit dragged down Treasury bond yields to record levels and marred the possibility of a near-term Fed rate hike. This sort of an interest rates’ backdrop hurt banks’ profitability by shrinking net interest margin.
It is cost containment that enabled the players to stay afloat. Plus, oil price recovery in Q2 did a lot in supporting the sector as U.S. banks have significant exposure to this long-ailing space (read: Earnings or Oil--What Will Drive Financial ETFs Ahead?).
Among the other favorable factors were solid fixed-income trading, gains in consumer banking as well as capital markets activity. Against such a backdrop, a peek into the headline numbers of the Q2 earnings season becomes essential. If we go by the Zacks Earnings Trends report issued on July 14, 2016, financial earnings are expected to fall 5.5% in Q2 on 0.6% lower revenues.
Let’s take a look at the actual figure reported by big banks:
Big Bank Earnings in Focus
The true star was JP Morgan ((JPM - Free Report) ) which reported earnings of $1.55 per share, beating the Zacks Consensus Estimate of $1.43 and improving 1% from the year-ago quarter. JPMorgan recorded revenues of $25.2 billion, which were marginally ahead of the Zacks Consensus Estimate of $24.06 billion. The top line was up 3% from the year-ago quarter.
Goldman (GS - Free Report) earned $3.72 per share, outpacing the Zacks Consensus Estimate of $3.01. Moreover, the bottom line compared favorably with the year-ago figure of $1.98 helped by cost containment. Net revenue declined 13% year over year to $7.9 billion but surpassed the Zacks Consensus Estimate of $7.6 billion.
Morgan Stanley’s ((MS - Free Report) ) second-quarter adjusted earnings from continuing operations of $0.75 per share surpassed the Zacks Consensus Estimate of $0.60 but fell 5% from the year-ago number. Net revenue grew 9% year over year to $8.91 billion. Moreover, it came ahead of the Zacks Consensus Estimate of $8.34 billion.
Citigroup Inc.’s (C - Free Report) adjusted earnings per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.09. However, earnings compared unfavorably with the year-ago figure of $1.51. Adjusted revenues of Citigroup declined 8% year over year to $17.55 billion. The revenue figure missed the Zacks Consensus Estimate of $17.57 billion.
Bank of America Corporation’s (BAC - Free Report) second-quarter earnings of $0.36 per share outdid the Zacks Consensus Estimate of $0.34 but were 16% lower than the prior-year quarter. Net revenue of $20.4 billion was down 7% year over year and missed the Zacks Consensus Estimate of $20.5 billion.
Wells Fargo ((WFC - Free Report) ) earned $1.01/share in Q2 which missed the Zacks Consensus Estimate by a penny. Moreover, the figure compared unfavorably with the prior-year quarter’s earnings of $1.03 per share. The quarter’s total revenue came in at $22.2 billion, in line with the Zacks Consensus Estimate. Revenues rose 4.2% year over year.
Market Impact
Despite just decent results from banks in the last one week, the concerned ETFs were loved by investors as these were expected to do much worse prior to their release. Most of the banks gave investors a sweet surprise, with J.P. Morgan initiating a finance sector rally. A renewed risk appetite also favored this space in the last five-day period (as of July 20, 2016) (read: Bearish on Upcoming Banking Earnings? Bet on These ETFs).
Each of the aforementioned companies have considerable exposure in funds like iShares U.S. Financial Services ETF (IYG - Free Report) , PowerShares KBW Bank ((KBWB - Free Report) ), Financial Select Sector SPDR (XLF - Free Report) , U.S. Broker-Dealers Index Fund (IAI - Free Report) and Vanguard Financials ETF (VFH - Free Report) . All the funds are in the green, having gained in the range of 1.2???2.7% in the last five trading sessions (as of July 20, 2016) (see all the financial ETFs here).
Going Forward
Now it remains to be seen how long this unexpected optimism in the banking earnings can guard financial ETFs from the feared Brexit fallout. Reasonable valuations, strong trading activity to start Q3, a likely Fed rate hike (sooner or later) thanks to an improving U.S. economy and the yet-to-be-realized Brexit blues may offer these ETFs some gains in the near term, though a faltering business backdrop is still a concern.
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Will Financial ETFs Forget Brexit and Gain on Decent Q2 Earnings?
The financial sector, which accounts for around one-fifth of the S&P 500 index, had a decent Q2. Some big banks came up with mixed results with a focus on bottom line beat while some others managed to beat on both lines.
Operating Backdrop
Global growth worries that led to lower demand for loans, weakness in equity trading revenues and lower investment banking fees acted against the space. Plus, risk-off trade sentiments amid global economic concerns and Brexit dragged down Treasury bond yields to record levels and marred the possibility of a near-term Fed rate hike. This sort of an interest rates’ backdrop hurt banks’ profitability by shrinking net interest margin.
It is cost containment that enabled the players to stay afloat. Plus, oil price recovery in Q2 did a lot in supporting the sector as U.S. banks have significant exposure to this long-ailing space (read: Earnings or Oil--What Will Drive Financial ETFs Ahead?).
Among the other favorable factors were solid fixed-income trading, gains in consumer banking as well as capital markets activity. Against such a backdrop, a peek into the headline numbers of the Q2 earnings season becomes essential. If we go by the Zacks Earnings Trends report issued on July 14, 2016, financial earnings are expected to fall 5.5% in Q2 on 0.6% lower revenues.
Let’s take a look at the actual figure reported by big banks:
Big Bank Earnings in Focus
The true star was JP Morgan ((JPM - Free Report) ) which reported earnings of $1.55 per share, beating the Zacks Consensus Estimate of $1.43 and improving 1% from the year-ago quarter. JPMorgan recorded revenues of $25.2 billion, which were marginally ahead of the Zacks Consensus Estimate of $24.06 billion. The top line was up 3% from the year-ago quarter.
Goldman (GS - Free Report) earned $3.72 per share, outpacing the Zacks Consensus Estimate of $3.01. Moreover, the bottom line compared favorably with the year-ago figure of $1.98 helped by cost containment. Net revenue declined 13% year over year to $7.9 billion but surpassed the Zacks Consensus Estimate of $7.6 billion.
Morgan Stanley’s ((MS - Free Report) ) second-quarter adjusted earnings from continuing operations of $0.75 per share surpassed the Zacks Consensus Estimate of $0.60 but fell 5% from the year-ago number. Net revenue grew 9% year over year to $8.91 billion. Moreover, it came ahead of the Zacks Consensus Estimate of $8.34 billion.
Citigroup Inc.’s (C - Free Report) adjusted earnings per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.09. However, earnings compared unfavorably with the year-ago figure of $1.51. Adjusted revenues of Citigroup declined 8% year over year to $17.55 billion. The revenue figure missed the Zacks Consensus Estimate of $17.57 billion.
Bank of America Corporation’s (BAC - Free Report) second-quarter earnings of $0.36 per share outdid the Zacks Consensus Estimate of $0.34 but were 16% lower than the prior-year quarter. Net revenue of $20.4 billion was down 7% year over year and missed the Zacks Consensus Estimate of $20.5 billion.
Wells Fargo ((WFC - Free Report) ) earned $1.01/share in Q2 which missed the Zacks Consensus Estimate by a penny. Moreover, the figure compared unfavorably with the prior-year quarter’s earnings of $1.03 per share. The quarter’s total revenue came in at $22.2 billion, in line with the Zacks Consensus Estimate. Revenues rose 4.2% year over year.
Market Impact
Despite just decent results from banks in the last one week, the concerned ETFs were loved by investors as these were expected to do much worse prior to their release. Most of the banks gave investors a sweet surprise, with J.P. Morgan initiating a finance sector rally. A renewed risk appetite also favored this space in the last five-day period (as of July 20, 2016) (read: Bearish on Upcoming Banking Earnings? Bet on These ETFs).
Each of the aforementioned companies have considerable exposure in funds like iShares U.S. Financial Services ETF (IYG - Free Report) , PowerShares KBW Bank ((KBWB - Free Report) ), Financial Select Sector SPDR (XLF - Free Report) , U.S. Broker-Dealers Index Fund (IAI - Free Report) and Vanguard Financials ETF (VFH - Free Report) . All the funds are in the green, having gained in the range of 1.2???2.7% in the last five trading sessions (as of July 20, 2016) (see all the financial ETFs here).
Going Forward
Now it remains to be seen how long this unexpected optimism in the banking earnings can guard financial ETFs from the feared Brexit fallout. Reasonable valuations, strong trading activity to start Q3, a likely Fed rate hike (sooner or later) thanks to an improving U.S. economy and the yet-to-be-realized Brexit blues may offer these ETFs some gains in the near term, though a faltering business backdrop is still a concern.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>