The financial sector, which accounts for around one-fifth of the S&P 500 index, is off to a stellar start to the Q3 earnings reporting cycle, shrugging off all fears relating to the financial well-being of big banks. Investors should note that questions were raised just before the earnings season on Deutsche Bank’s ability to pay huge potential fines and Wells Fargo’s sales scandal (read: Financial ETFs in Focus on Wells Fargo's Sales Scandal).
But the clouds dispersed as the big banking companies started coming up with a beat on both lines in Q3 earnings. Drivers of the outperformance were a rise in fixed income, currency and commodities trading revenue, higher mortgage banking income and moderate investment banking business (read: U.S. Banks Clear Stress Test: Financial ETFs in Focus).
Below we highlight some key banking earnings reported in the last five days:
Big Bank Earnings in Focus
JP Morgan (JPM - Free Report) reported earnings of $1.58 per share beating the Zacks Consensus Estimate of $1.40. However, the figure reflects a 6% decline from the year-ago period. JPMorgan recorded managed net revenue of $25.5 billion, which came in ahead the Zacks Consensus Estimate of $24 billion and grew 8% from the year-ago quarter.
Wells Fargo (WFC - Free Report) , which drew a lot of attention following the sales scandal earned $1.03/share in Q3, beating the Zacks Consensus Estimate by a penny. However, earnings compared unfavorably with the prior-year quarter’s earnings of $1.05 per share. The quarter’s total revenue of $22.3 billion outdid the Zacks Consensus Estimate of $22 billion. Revenues also grew around 2% on a year-over-year basis.
Citigroup Inc.’s (C - Free Report) earnings from continuing operations per share of $1.25 for Q3, ahead of the Zacks Consensus Estimate of $1.16. However, earnings compared unfavorably with the year-ago figure. Adjusted revenues declined 4% year over year to $17.76 billion but outpaced the Zacks Consensus Estimate of $17.38 billion.
Bank of America Corporation’s (BAC - Free Report) third-quarter 2016 earnings of $0.41 per share surpassed the Zacks Consensus Estimate of $0.34. Also, the figure was 8% higher than the prior-year quarter number. Net revenue came in $21.9 billion, up 3% from the prior-year quarter and ahead of the Zacks Consensus Estimate of $20.8 billion.
Goldman (GS - Free Report) earned $4.88 per share in Q3, beating the Zacks Consensus Estimate of $3.86. Moreover, the bottom line witnessed a significant improvement of 68% year over year. Net revenue surged 19% year over year to $8.2 billion and surpassed the Zacks Consensus Estimate of $7.6 billion.
Morgan Stanley’s (MS - Free Report) third-quarter 2016 earnings from continuing operations of $0.80 per share crushed the Zacks Consensus Estimate of $0.64. Further, earnings skyrocketed 138% year over year, excluding DVA adjustments. Net revenue amounted to $8.9 billion, reflecting an increase of 15% from the prior-year quarter. It also surpassed the Zacks Consensus Estimate of $8.2 billion
Other Factors to Drive Banking Stocks Ahead
If earnings offered the troubled banking space a fresh lease of life, the rising rate prospects in the U.S. may spell a miracle for these stocks and ETFs.
Chances of a rebound in oil prices amid the likely output curb deal by the OPEC members in November can also act as a positive bias on the space. This is because U.S. banks have significant exposure to the long-beleaguered energy sector. But lately, with the oil price recovery, tension over credit default seems to be diminishing (read: Bank ETFs Surge: Will the Momentum Last?).
Several big banks witnessed a reduction in losses arising out of loans to the energy sector, as per an article published in Financial Times. Citigroup indicated that a $50-oil can lead to considerable M&A and refinancing activity. Notably, WTI crude oil ETF United States Oil (USO) added about 15.8% in the last one month (as of October 19, 2016).
Thus, investors, who have pinned their hopes on an astral earnings season and favorable fundamentals, can play iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF (IYF - Free Report) , PowerShares KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) (see all Financial ETFs here).
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