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Why is the Market Unimpressed with Bank Earnings?

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The market appears to be painting JPMorgan (JPM) with the same brush as Wells Fargo (WFC) and Citigroup (C) after their quarterly releases, but 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.  

It isn’t hard to appreciate the market’s negative reaction to the Wells and Citi reports, but the post-release weakness in JPMorgan shares is likely nothing more than a sell-the-news type of mindset. There is likely a comparability ground for the market’s lack of appreciation for these results as well. Two new accounting rules took effect this quarter, one dealing with revenue recognition on the asset management side and the other dealing with the valuation of ‘hard-to-price’ securities on the balance sheets. The earnings releases specify the impact of these rule changes, but they add to the ‘noise’ around these results.

Wells Fargo didn’t seem to benefit much from higher interest rates as rival JPMorgan did, likely indicating that the beleaguered bank had the wrong type of interest rate hedges in place. The bank is in the process of concluding a regulatory settlement that will require a restatement of today’s results in the coming days, but management wasn’t able to shed any more light on that issue beyond indicating that more details should be available in the 10Q. As such, it’s hard to read too much into Wells’ Q1 report as it will undergo a restatement in the coming days

We recently made a contrarian call on Wells by adding it to the Zacks Focus List, our core thesis being that worst was already priced in the stock and the market will slowly be coming around to appreciating this fact. The internals of the Wells report indicate that the estimate revisions trend for the current and coming quarters will likely be negative, in contrast to what can reasonably be expected for JPMorgan and Citi, which will keep the stock under pressure. This means that our Focus List call on Wells may have been premature, with the stock’s underperformance relative to its peers likely to persist a lot longer than we envisaged.

The chart below shows the year-to-date performance comparison Citi, JPMorgan, Wells and the S&P 500 index.

Wells’ net interest margin, the difference between what it pays depositors and what it charges borrowers, was flat from the preceding quarter and down from the year-earlier level. Growth in the bank’s loan portfolio and expenses also compare unfavorably with its peers. Wells’ loan portfolio was down from the year-earlier level while the same at Citi and JPMorgan were up +7% and 8%, respectively.

Citi’s results failed to impress as well, with the bank’s trading business, particularly the fixed income desk, failed to fully capitalize on the all-around volatility in Q1. Unlike JPMorgan’s +8% revenue growth in the fixed income, currencies and commodities or FICC business, Citi’s FICC revenue was down -7% in Q1.

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

We now have Q1 results from 5 of the 98 Finance sector companies in the S&P 500 index. Keep in mind however that these 5 companies account for 23.7% of the sector’s total market capitalization in the index.

Total earnings for these 5 Finance companies are up +20.4% from the same period last year on +6.9% higher revenue growth, with 100% beating EPS estimates and 60% 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 materially tracking above what we have been seeing in recent years, reflecting the combined effect of tax cuts, higher interest rates and more ‘normal’ capital markets activity. The right-hand side chart shows that earnings surprises are very numerous, but keep in mind that we are talking about 5 earnings reports at this stage.

For the quarter as a whole, total Finance sector earnings are expected to be up +22.7% from the same period last year on +4.7% higher revenues. This would follow +0.6% earnings growth in 2017 Q4 on +4% higher revenues.

The sector’s earnings growth momentum is expected to continue in the coming quarters as well, as the chart below shows.

Please note that the sector’s strong growth in Q1 and beyond isn’t a function of easy comparisons, but actual growth. You can see this in the dollar value of total sector earnings in the chart below.

The table below shows the sector’s Q1 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding four periods.

Please note that the Major Banks industry, of which JPMorgan, Bank of America and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

Driving this improved earnings picture for the banks and other finance companies is the combination of lower taxes and higher interest rates.

Expectations for 2018 Q1 As a Whole

The strong momentum we saw in the preceding earnings season is expected to continue this reporting cycle as well, with total earnings for the S&P 500 index expected to be up +16.6% from the same period last year on +7.5% higher revenues. This would follow the +13.4% earnings growth on +8.6% revenue growth in the 2017 Q4 earnings season, the best quarterly performance in more than 6 years.

There were two aspects of the preceding earning season that really stood out and put that reporting cycle in a category of its own; we will be looking to what extent these two aspect s get repeated this earnings season. These two standout features of the 2017 Q4 earnings season were the very strong momentum on the revenue front and impressive turnaround on the estimate revisions front.

The revenue momentum likely reflected a combination of the synchronized global growth environment and a favorable foreign exchange backdrop. With both of those factors still very much in play in Q1 as well, we can reasonably expect to see the revenue momentum trend continue this earnings season as well.

The story about trends in 2018 Q1 estimate revisions is better told by the chart below.

What this chart shows is that earnings growth expectations for 2018 Q1 moved up significantly since mid-December 2017. This represented a major trend shift relative to what we have been seeing over the last many years when estimates would actually be moving in the opposite direction. To be fair, the revisions trend had stabilized in the preceding quarters as well, with estimates for 2017 Q4 essentially remaining unchanged in the three months ahead of the start of that reporting cycle.

A big driver of these positive revisions is obviously the direct impact of the tax cuts, but that isn’t the only reason, as you can see in the revisions trend for revenues in the chart below.

We will be keeping a close eye on how estimates for 2018 Q2 evolve as companies report Q1 results and share their outlook for Q2 and beyond. Estimates for Q2 went up as well, as they did for the following quarters, when the same was happening to 2018 Q1 estimates. As of today, total Q2 earnings for the S&P 500 index are expected to be up +17.7% from the same period the year before on +7.2% higher revenues.

The chart below shows 2018 Q1 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to accelerate in Q2 and continue in the following quarters.

As you can imagine, expectations for full-year 2018 are for an impressive showing, with total earnings for the S&P 500 index expected to be +17.8% from the year-earlier level on +5.2% higher revenues. If achieved, this will be the highest annual growth pace for the index since 2010.

The table below shows the summary picture for 2018 Q1, contrasted with what was actually achieved in the preceding period.

Standout Sectors

As you can see, the Energy sector remains a big growth contributor in Q1, with total earnings for the sector expected to be up +59.4% from the year-earlier period on +16.1% higher revenues. But growth for the quarter would still be in double-digits even on an ex-Energy basis (last row in the table above).

What is driving the strong Q1 growth isn’t the Energy sector, but rather the breadth of growth across all sectors, with double-digit earnings growth for 11 out of the 16 Zacks sectors, including Technology and Finance.

For the Technology sector, total Q1 earnings are expected to be up +20.7% on +11.4% higher revenues, which would follow the sector’s impressive +24.2% earnings growth on +11.1% higher revenue growth.

The Finance sector, which sat out the preceding quarter with an essentially flat showing, total Q1 earnings are expected to be up +22.7% from the same period last year on +4.7% higher revenues.

Driving the Finance sector’s strong growth in Q1 and beyond is the combined effect of tax cuts, higher interest rates and an improved domestic growth environment. Finance sector’s earnings were only up +1.2% in full-year 2017 and in low single digits in the three years prior to that, but are on expected to be up an impressive +25.1% in full-year 2018.

The Technology sector, on the other hand, has already been on stronger ground, with full-year 2017 earnings for the sector up +15.8% and expected to be up +17.3% in 2018. The enterprise spending environment was expected to improve this year even before the tax cuts, with the tax windfall expected to give a much needed boost to those trends. On top of these we have the existing secular trends in cloud computing, artificial intelligence and big data that are expected to remain growth areas in the space.

Please note that Technology and Finance aren’t just any two sectors out of the 16 in the S&P 500 index; these two sectors combined are the twin pillars of index’s total profitability, bringing in more than 40% of the index’s total earnings this year. The Energy sector’s outlook has improved, but the sector simply lacks the heft of these two. The Energy sector is expected to bring in about 5% of the index’s total earnings this year.

Reporting Calendar

As you can see in the chart above, the reporting cycle is ramping up with more than 150 companies reporting results, including 56 S&P 500 members. While the bulk of this week’s reports are dominated by the Finance sector, we have a number of leading players from other sectors reporting results already. The major non-financial reports on deck to report results this week include Netflix (NFLX) on Monday, IBM (IBM) on Tuesday, and Schlumberger (SLB - Free Report) and GE (GE) on Friday.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on 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.

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Here is a list of the 153 companies including 56 S&P 500 and reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
M&T BANK CORPMTB2.742.1510.83%MondayBTO
BANK OF AMER CPBAC0.590.416.82%MondayBTO
NETFLIX INCNFLX0.630.40.00%MondayAMC
CELANESE CP-ACE2.331.816.45%MondayAMC
LAKELAND INDSLAKE0.190.1321.05%MondayAMC
Charles SchwabSCHW0.540.39-0.36%MondayN/A
JOHNSON & JOHNSJNJ2.011.831.16%TuesdayBTO
COMERICA INCCMA1.561.022.40%TuesdayBTO
PROLOGIS INCPLD0.740.631.52%TuesdayBTO
GOLDMAN SACHSGS5.675.1515.92%TuesdayBTO
OMNICOM GRPOMC1.050.970.65%TuesdayBTO
LAM RESEARCHLRCX4.362.817.62%TuesdayAMC
CSX CORPCSX0.660.5114.29%TuesdayAMC
INTL BUS MACHIBM2.392.380.19%TuesdayAMC
UNITED CONT HLDUAL0.250.44.48%TuesdayAMC
FULTON FINLFULT0.290.250.00%TuesdayAMC
HOPE BANCORPHOPE0.380.283.23%TuesdayAMC
LEGACY TX FINLLTXB0.720.37-3.23%TuesdayAMC
BADGER METERBMI0.390.38.70%TuesdayAMC
ADTRAN INCADTN-0.190.15225.00%TuesdayAMC
UNITED FIN BCPUBNK0.280.27-17.24%TuesdayAMC
UTD COMM FIN CPUCFC0.170.16.67%TuesdayAMC
CONSOL TOMOKACTO1.252.27-27.66%TuesdayAMC
ABBOTT LABSABT0.580.481.37%WednesdayBTO
US BANCORPUSB0.940.821.15%WednesdayBTO
TEXTRON INCTXT0.490.46-3.90%WednesdayBTO
MORGAN STANLEYMS1.2819.09%WednesdayBTO
QCR HLDGS INCQCRH0.710.686.06%WednesdayBTO
ASML HOLDING NVASML1.381.1241.60%WednesdayBTO
FREDS INCFREDN/A-0.11-180.00%WednesdayBTO
MGIC INVSTMT CPMTG0.360.3159.26%WednesdayBTO
SL GREEN REALTYSLG1.641.570.00%WednesdayAMC
UTD RENTALS INCURI2.431.640.00%WednesdayAMC
AMER EXPRESS COAXP1.731.342.60%WednesdayAMC
TORCHMARK CORPTMK1.461.150.81%WednesdayAMC
CROWN CASTLECCI1.261.2423.76%WednesdayAMC
STEEL DYNAMICSSTLD0.910.8210.20%WednesdayAMC
CROWN HLDGS INCCCK0.80.720.00%WednesdayAMC
CVB FINLCVBF0.310.263.70%WednesdayAMC
BOSTON PRIV FINBPFH0.220.15-4.35%WednesdayAMC
CATHAY GENL BCPCATY0.790.61-3.17%WednesdayAMC
GREAT SOUTH BCPGSBC0.870.818.54%WednesdayAMC
UNIVL FST PRODSUFPI0.420.3414.69%WednesdayAMC
CDN PAC RLWYCP2.161.9-1.17%WednesdayAMC
TEXAS CAP BCSHSTCBI1.370.82.59%WednesdayAMC
SLEEP NUMBER CPSNBR0.560.5665.00%WednesdayAMC
UMPQUA HLDGS CPUMPQ0.280.216.90%WednesdayAMC
ALCOA CORPAA0.640.63-15.45%WednesdayAMC
PTC INCPTC0.160.1217.65%WednesdayAMC
PIER 1 IMPORTSPIR0.190.34-25.00%WednesdayAMC
VALMONT INDSVMI1.81.68-0.60%WednesdayAMC
TRIUMPH BANCORPTBK0.560.0217.39%WednesdayAMC
EAGLE BCP INCEGBN1.030.77-1.12%WednesdayAMC
FIRST CT BANCRPFBNK0.410.32-2.86%WednesdayAMC
BANCORPSOUTH BKBXS0.50.392.44%WednesdayAMC
COHEN&STRS INCCNS0.610.470.00%WednesdayAMC
RLI CORPRLI0.50.446.25%WednesdayAMC
TRISTATE CP HLDTSC0.340.263.03%WednesdayAMC
NUCOR CORPNUE1.11.1118.18%ThursdayBTO
GRAINGER W WGWW3.372.8834.86%ThursdayBTO
PENTAIR PLCPNR0.830.65-1.06%ThursdayBTO
DANAHER CORPDHR0.940.852.59%ThursdayBTO
PEOPLES UTD FINPBCT0.30.2214.81%ThursdayBTO
SNAP-ON INCSNA2.742.391.13%ThursdayBTO
BB&T CORPBBT0.920.745.00%ThursdayBTO
KEYCORP NEWKEY0.380.320.00%ThursdayBTO
QUEST DIAGNOSTCDGX1.531.330.73%ThursdayBTO
BANK OF NY MELLBK0.970.80.00%ThursdayBTO
GENUINE PARTSGPC1.321.080.90%ThursdayBTO
PPG INDS INCPPG1.411.350.85%ThursdayBTO
PHILIP MORRISPM0.870.98-3.68%ThursdayBTO
ALLIANCE DATAADS4.213.6429.24%ThursdayBTO
COMP TASKCTG0.060.050.00%ThursdayBTO
TAIWAN SEMI-ADRTSM0.60.541.59%ThursdayBTO
EAST WEST BCEWBC10.88-5.43%ThursdayBTO
WABCO HOLDINGSWBC1.831.4711.11%ThursdayBTO
WEBSTER FINL CPWBS0.790.62-2.99%ThursdayBTO
SYNTEL INCSYNT0.440.4658.97%ThursdayBTO
SONOCO PRODUCTSSON0.720.59-1.37%ThursdayBTO
BLACKSTONE GRPBX0.760.821.43%ThursdayBTO
GATX CORPGATX1.171.44-5.56%ThursdayBTO
CHART INDUSTRIEGTLS0.190.0143.75%ThursdayBTO
S&T BANCORP INCSTBA0.70.523.17%ThursdayBTO
SANDY SPRINGSASR0.750.631.59%ThursdayBTO
NOVARTIS AG-ADRNVS1.331.133.45%ThursdayBTO
TILE SHOP HLDGSTTS0.080.16-200.00%ThursdayBTO
ABB LTD-ADRABB0.310.2832.00%ThursdayBTO
LAWSON PRODUCTSLAWS0.160.09-112.50%ThursdayBTO
E TRADE FINL CPETFC0.780.483.23%ThursdayAMC
LIMELIGHT NETWKLLNW-0.01-0.01100.00%ThursdayAMC
MARTEN TRANSMRTN0.190.150.00%ThursdayAMC
ASSOC BANC CORPASB0.410.357.89%ThursdayAMC
WERNER ENTRPRSWERN0.370.227.69%ThursdayAMC
ATLASSIAN CP-ATEAM-0.03-0.05-133.33%ThursdayAMC
GLACIER BANCORPGBCI0.530.41-4.35%ThursdayAMC
FIRST FIN BC-OHFFBC0.460.399.76%ThursdayAMC
PREFERRED BANKPFBC1.070.718.89%ThursdayAMC
EXPONENT INCEXPO0.620.3914.63%ThursdayAMC
ROGERS COMM CLBRCI0.620.461.47%ThursdayAMC
CHEMED CORPCHE2.371.8210.94%ThursdayAMC
CHEROKEE INCCHKE0.070.15-171.43%ThursdayAMC
DAVIDSTEA INCDTEA0.230.296.67%ThursdayAMC
INDEP BK MASSINDB1.030.781.14%ThursdayAMC
BRANDYWINE RTBDN0.320.32-3.03%ThursdayAMC
PZENA INVESTMNTPZN0.190.1211.76%ThursdayAMC
REGIONS FINL CPRF0.310.233.85%FridayBTO
SUNTRUST BKSSTI1.110.873.81%FridayBTO
SYNCHRONY FINSYF0.750.6111.11%FridayBTO
CITIZENS FIN GPCFG0.760.615.97%FridayBTO
STATE ST CORPSTT1.581.217.02%FridayBTO
KANSAS CITY SOUKSU1.371.171.47%FridayBTO
WASTE MGMT-NEWWM0.820.662.41%FridayBTO
BAKER HUGHES GEBHGE0.07-0.047.14%FridayBTO
PROCTER & GAMBLPG0.990.963.48%FridayBTO
STANLEY B&D INCSWK1.351.291.87%FridayBTO
GENL ELECTRICGE0.110.21-3.57%FridayBTO
GENTEX CORPGNTX0.40.333.13%FridayBTO
MANPOWER INC WIMAN1.651.093.41%FridayBTO
MOBILE MINI INCMINI0.340.2513.89%FridayBTO
ERICSSON LM ADRERIC-0.03-0.27-450.00%FridayBTO
OFG BANCORPOFG0.270.26311.11%FridayBTO
CONTROLADORA VLVLRS-0.15-0.7127.27%FridayBTO

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