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What's in Store for Banking ETFs in Q3 Earnings Season?

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With the banking sector still grappling with multiple issues and questions over the financial well-being of Deutsche Bank and Wells Fargo (WFC - Free Report) looming large, investors wait with bated breath for the Q3 earnings releases of the sector (read: Should You Worry About Deutsche Bank ETFs?).

While doubts over the health of some big banks mar prospects in the banking sector, chances of a rebound in oil prices and a rising rate environment are uplifting (read: ETF Strategies for a Rising Rate Environment).

Let’s take a look at how the banking stocks and the related ETFs will likely respond to such key events and perform throughout the reporting cycle.

Inside Surprise Prediction

Citigroup (C - Free Report) , JPMorgan Chase (JPM - Free Report) and Wells Fargo are expected to report earnings before the market opens on October 14 (see all financial ETFs here).

Citigroup has a Zacks Rank #3 (Hold) and an Earnings ESP of 1.74%, which indicates a likely earnings beat. Further, the industry rank for the stock is in the top 42% of the Zacks universe. However, the VGM score of the stock is ‘D.’

JPMorgan Chase has a Zacks Rank #2 (Buy) and an Earnings ESP of negative 1.44%. Our proven model does not conclusively show that JPMorgan is likely to beat earnings since a company needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 or 3 for an earnings beat. While its VGM score of ‘F’ acts as a dampener, the industry rank is strong.

Wells Fargo – now known for its sales scandal – has a Zacks Rank #3 and Earnings ESP of 0.00%. This makes surprise prediction difficult. The VGM score of the stock is ‘D’ (read: Financial ETFs in Focus on Wells Fargo's Sales Scandal).

Bank of America Corporation (BAC - Free Report) is expected to report earnings on October 17. The company has a Zacks Rank #3 and an Earnings ESP of 0.00%. Thus, chances of a beat are slim. Again, its VGM score of ‘F’ is discouraging.

Goldman Sachs Group Inc. (GS - Free Report) will likely report on October 18. The stock has a Zacks Rank #3 and a negative Earnings ESP of 2.07%, again dimming hopes of an earnings beat. Its underlying industry is in the top 26% while the stock has a VGM score of ‘F.’

Morgan Stanley (MS - Free Report) is likely to report results on October 19. It has a Zacks Rank #3 but a negative Earnings ESP of 3.08%, which makes surprise prediction difficult. The stock has a VGM score of ‘D.’

Fundamental Backdrop  

Operating backdrop is mixed with global growth issues being a key concern. This can result in lower loan growth.

As per the source, “Citigroup last month cited better trading in Q3 but weaker-than-anticipated investment banking, while JPMorgan remained upbeat on the economy and the state of the consumer.”

Though the broader pattern of surprise prediction, fundamentals and ranks do not speak highly of banking earnings, investors should note that the rising rate prospects in the U.S. may spell a miracle for banking stocks and ETFs, even if these end up posting weak numbers (read: Financial ETFs Surged in August: Will the Rally Last?).

Thus, investors who have pinned their hopes on a rate hike may play  iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF IYF, PowerShares KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) .

And those who want to go by the apparently slim chances of an earnings beat, may find inverse ETFs like ProShares Short Financials ETF (SEF - Free Report) , ProShares UltraShort Financials ETF (SKF) and ProShares UltraPro Short Select Sector ETF (FINZ - Free Report) appealing.

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