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Banking Earnings Downbeat: What's in Store for ETFs?

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The financial sector, which accounts for around one-fifth of the S&P 500 Index, had a mixed-bag Q2. Only two out of six big U.S. banks was able to beat overall. For the Finance sector, we now have Q2 results from 40.8% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance companies are down 27% on 1.6% lower revenues, with 62.5% beating EPS estimates and

54.2% beating revenue estimates, per Zacks Earnings Trends issued on Jul 20, 2022.

Let’s take a look at the big banks’ earnings which released lately.

Big Bank Earnings in Focus        

Higher reserve build and decline in investment banking (IB) fees affected JPMorgan’s (JPM - Free Report) second-quarter 2022 earnings of $2.76 per share, which missed the Zacks Consensus Estimate of $2.85. The reported quarter’s results included a net credit reserve build of $428 million. Net revenues as reported were $30.7 billion, up 1% year over year. The top line lagged the Zacks Consensus Estimate of $31.7 billion.

Citigroup Inc.’s (C - Free Report) second-quarter 2022 income from continuing operations per share of $2.30 have handily outpaced the Zacks Consensus Estimate of $1.67. However, the reported figure declined 19% from the prior-year quarter. After reporting better-than-expected earnings, shares of the company moved up 13% in the key trading session on Jul 15, 2022. Basically, the rising rate environment went in favor the bank.

Revenues, net of interest expenses, moved up 11% year over year to $19.6 billion in the second quarter. The top line outpaced the Zacks Consensus Estimate of $18.43 billion (read: Citigroup Up 13% Post Earnings: Time for Citi-Heavy ETFs?).

Wells Fargo’s (WFC - Free Report) second-quarter 2022 earnings per share of 74 cents lagged the Zacks Consensus Estimate of 77 cents. Also, the bottom line declined 14% year over year. Total revenues came in at $17.03 billion, missing the Zacks Consensus Estimate of $17.46 billion. Also, the top line decreased 16% from the year-ago quarter.

Quarterly revenue generation from the business segments was decent on a year-over-year basis. The Consumer Banking and Lending segment’s top line declined 2%, while that of the Commercial Banking segment increased 18%. Further, revenues in the Corporate and Investment Banking and the Wealth and Investment Management units rose 4% and 5%, respectively. 

Bank of America’s (BAC - Free Report) second-quarter 2022 earnings of 73 cents per share have lagged the Zacks Consensus Estimate of 77 cents. The bottom line compared unfavorably with $1.03 per share earned in the prior-year quarter.

As expected, the company’s investment banking (IB) business did not perform well. IB fees of $1.1 billion plunged 47% year over year in the quarter, reflecting weaker industry-wide performance of the underwriting business. Advisory fees declined 3.7% to $392 million. Net revenues were $22.69 billion, which marginally lagged the Zacks Consensus Estimate of $22.97 billion. The top line grew 5.7% from the prior year.

The Goldman Sachs Group, Inc.’s (GS - Free Report) second-quarter 2022 earnings per share of $7.73 have surpassed the Zacks Consensus Estimate of $6.99. However, the bottom line fell 48.5% from the year-earlier quarter. Net revenues of $11.86 billion fell 23% from the year-ago quarter. Nonetheless, the top line beat the Zacks Consensus Estimate of $11.05 billion.

Morgan Stanley’s (MS - Free Report) second-quarter 2022 adjusted earnings of $1.44 per share lagged the Zacks Consensus Estimate of $1.55. The bottom line reflects a decline of 24% from the year-ago quarter.

The performance of the investment banking (“IB”) business was not good. Equity underwriting fees decreased 86% from the prior-year quarter and fixed-income underwriting declined 49%. Advisory fees were down 10% year over year. Therefore, IB fees declined 55%.

Net revenues were $13.1 billion, down 11% from the prior-year quarter. The top line missed the Zacks Consensus Estimate of $13.3 billion.

ETF Impact

Though earnings have been downbeat-to-moderate, the sector may gain from rising rates (thanks to rising inflation and faster rate hikes). All the aforementioned companies have considerable exposure in funds like iShares U.S. Financial Services ETF (IYG - Free Report) , Invesco 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) . Given the decent valuation of the sector and chances of higher net interest rate margins, investors can keep a track of these ETFs for gains.