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Big Banks' Q2 Earnings Synopsis: Near-Term View in the Balance
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Wall Street banks that mainly serve U.S. consumers have mostly stolen the show in the June quarter, outpacing those with lesser exposure to this business. However, the largest banks now expect the probable Fed rate cut to trim their lending margins. In fact, a deeper or multiple rate cuts might squeeze margins to a greater extent. Notably, some of the biggest banks have already slashed their deposit rates, clouding the near-term outlook.
Nevertheless, a resilient overall financial system and announcement of fresh buybacks and dividend hikes will lend support to bank stocks.
Consumer Lending Aids Big Banks, Investment Banking Hurts
Till recently, American consumers were quite optimistic, powered by increasing wages, low level of unemployment and favorable interest rates. The Fed’s decision to hold rates steady prompted domestic consumers to boost usage of credit cards more than debit cards. Notably, with the fall in 30-year average fixed mortgage rates below 4% since 2017, the origination of mortgages at banks increased significantly through the June quarter of 2019.
Overall, thriving consumer operations helped Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and Citigroup Inc. (C - Free Report) report stellar earnings. The banks not only surpassed the Zacks Consensus Estimate in the June quarter but also reported an improvement in year-over-year earnings. However, owing to the lack of significant presence in the consumer business, The Goldman Sachs Group, Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report) were the only leading banks in America with an earnings decline from the year-ago levels.
However, the scenario was different for the banks’ investment banking operations. While domestic consumers were upbeat about the economy, institutional investors have been nervous. The slowdown in the global economy owing to trade tensions surrounding United States, China and Mexico irked corporate and investment banking clients. The possibility of an interest rate cut by the Fed in 2019, signaling that slower global growth will weigh on the U.S. economy, also kept large investors from making big deals or trades. The factors dented big banks’ profits from corporate & investment banking.
Expected Fed Rate Cut a Dampener, Buybacks to Support Stocks
Although Wall Street banks have managed to beat the Zacks Consensus Estimate comprehensively this earnings season, the near-term prospect looks bleak with a rate cut expected as soon as this month. In other words, since the net interest margin is a big deal for banks, probable rate cuts are a concern.
JPMorgan recently said that three rate cuts could be in the cards this year. The latest prediction by the investment bank completely contradicts its earlier projection. In fact, during the results announcement for the March quarter of 2019, JPMorgan didn’t anticipate any rate cut for 2019. Notably, from its projection of more than $58 billion in net lending profits in 2019, JPMorgan has revised its margin lower to $57.5 billion. The bank even mentioned that multiple cuts in Fed rate could further squeeze its net interest margin.
Nonetheless to mention, massive stock buyback programs and dividend hike announcements by the largest banks could significantly counter share price deterioration caused by predictions of their shrinking profits.
Last month’s Fed announcement that all the 18 largest banks of the United States, except Credit Suisse, have cleared stress tests shows that Wall Street players have sufficient capital to survive a severe financial crisis, paving the way for boosting payouts.
Importantly, after passing the stress test, Goldman Sachs raised its share repurchase program authorization to $7 billion from $5 billion a year ago. The investment bank also hiked quarterly dividend by roughly 50%. Moreover, JPMorgan is planning a fresh capital repurchase program of $29.4 billion — up from prior year’s $20.7 billion — along with a dividend hike. Both Goldman Sachs and JPMorgan carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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.
Image: Bigstock
Big Banks' Q2 Earnings Synopsis: Near-Term View in the Balance
Wall Street banks that mainly serve U.S. consumers have mostly stolen the show in the June quarter, outpacing those with lesser exposure to this business. However, the largest banks now expect the probable Fed rate cut to trim their lending margins. In fact, a deeper or multiple rate cuts might squeeze margins to a greater extent. Notably, some of the biggest banks have already slashed their deposit rates, clouding the near-term outlook.
Nevertheless, a resilient overall financial system and announcement of fresh buybacks and dividend hikes will lend support to bank stocks.
Consumer Lending Aids Big Banks, Investment Banking Hurts
Till recently, American consumers were quite optimistic, powered by increasing wages, low level of unemployment and favorable interest rates. The Fed’s decision to hold rates steady prompted domestic consumers to boost usage of credit cards more than debit cards. Notably, with the fall in 30-year average fixed mortgage rates below 4% since 2017, the origination of mortgages at banks increased significantly through the June quarter of 2019.
Overall, thriving consumer operations helped Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and Citigroup Inc. (C - Free Report) report stellar earnings. The banks not only surpassed the Zacks Consensus Estimate in the June quarter but also reported an improvement in year-over-year earnings. However, owing to the lack of significant presence in the consumer business, The Goldman Sachs Group, Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report) were the only leading banks in America with an earnings decline from the year-ago levels.
However, the scenario was different for the banks’ investment banking operations. While domestic consumers were upbeat about the economy, institutional investors have been nervous. The slowdown in the global economy owing to trade tensions surrounding United States, China and Mexico irked corporate and investment banking clients. The possibility of an interest rate cut by the Fed in 2019, signaling that slower global growth will weigh on the U.S. economy, also kept large investors from making big deals or trades. The factors dented big banks’ profits from corporate & investment banking.
Expected Fed Rate Cut a Dampener, Buybacks to Support Stocks
Although Wall Street banks have managed to beat the Zacks Consensus Estimate comprehensively this earnings season, the near-term prospect looks bleak with a rate cut expected as soon as this month. In other words, since the net interest margin is a big deal for banks, probable rate cuts are a concern.
JPMorgan recently said that three rate cuts could be in the cards this year. The latest prediction by the investment bank completely contradicts its earlier projection. In fact, during the results announcement for the March quarter of 2019, JPMorgan didn’t anticipate any rate cut for 2019. Notably, from its projection of more than $58 billion in net lending profits in 2019, JPMorgan has revised its margin lower to $57.5 billion. The bank even mentioned that multiple cuts in Fed rate could further squeeze its net interest margin.
Nonetheless to mention, massive stock buyback programs and dividend hike announcements by the largest banks could significantly counter share price deterioration caused by predictions of their shrinking profits.
Last month’s Fed announcement that all the 18 largest banks of the United States, except Credit Suisse, have cleared stress tests shows that Wall Street players have sufficient capital to survive a severe financial crisis, paving the way for boosting payouts.
Importantly, after passing the stress test, Goldman Sachs raised its share repurchase program authorization to $7 billion from $5 billion a year ago. The investment bank also hiked quarterly dividend by roughly 50%. Moreover, JPMorgan is planning a fresh capital repurchase program of $29.4 billion — up from prior year’s $20.7 billion — along with a dividend hike. Both Goldman Sachs and JPMorgan carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 >>