Major U.S. banks, constituting approximately 45% of the Finance sector’s total earnings, always draw substantial attention from investors as their earnings reflect overall health of the economy. There has been a gradual improvement in the operating environment for banks in 2016.
While the backdrop was tough in the beginning of 2016, banks confronted the challenges and delivered decent results. Now, with an improvement in the operating environment, they should do even better.
However, major banks are expected to witness an earnings decline of 4.3% year over year in the fourth quarter. This compares unfavorably with 5.3% growth witnessed in the prior quarter.
(For detailed look at the earnings outlook for this sector and others, please read our Earnings Preview report).
The dismal expectation is perhaps based on the continued rise in mortgage rates during the quarter, which is likely hamper fresh mortgage originations and refinancing for these banks. Further, an increase in provision for credit losses, mainly due to continued rise in credit card debt, should have an adverse impact on the banks’ financials. In addition, the current oil price situation might lead to a slight rise in provisions.
Though the Federal Reserve hiked the rate by 0.25% in mid-December (leading to a rise in prime lending rates for all major banks), the benefit is less likely to be witnessed in the fourth quarter. Nonetheless, a rise in the 10-year Treasury yield since Nov 8, 2016, is expected to alleviate pressure on net interest margin to some extent.
Further, with an improving economy, overall loan demand is expected to be strong.
On the non-interest income front, trading revenues are anticipated to increase, driven by the strength in fixed income and currencies. Further, equity trading is likely to have improved marginally, since the election results.
Per the Dealogic data, M&A activity remains robust, but the total deal value of announced M&As across the world decreased during the quarter. Further, debt underwriting improved while equity underwriting continued to be lackluster. Notably, banks should witness a rise in investment banking fees driven by robust M&A activity and increase in debt underwriting.
On the expense front, banks are continuously looking for cost-saving opportunities to enhance the bottom-line performance. Among other steps to control costs, banks are increasingly spending on technological advancements in order to substitute labor and manage higher volumes, and increase operational efficiency.
Additionally, a substantial decrease in legal expenses will be another major positive for the fourth-quarter results.
Picking the Winning Stocks
With the modest improvement in operating environment, upcoming results from some of the banks are expected to reflect resilience. Hence, this is the right time for you to pick some banking stocks that are well poised to beat earnings in their upcoming releases.
Choosing the most rewarding stocks within the industry might be a difficult task unless one knows the process to narrow down the list. One way to do it is by choosing stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage of difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Major Banks Poised for Earnings Surprises
Here are five major regional bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
Citigroup Inc. (C - Free Report) is slated to release results on Jan 13. The company has an Earnings ESP of +3.60% and it carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
JPMorgan Chase & Co. (JPM - Free Report) has an Earnings ESP of +0.70% and carries a Zacks Rank #2. It is scheduled to report results on Jan 13.
The Earnings ESP for The PNC Financial Services Group, Inc. (PNC - Free Report) is +1.61% and it carries a Zacks Rank #2. The company is scheduled to release results on Jan 13.
U.S. Bancorp (USB - Free Report) has an Earnings ESP of +1.25% and it carries a Zacks Rank #2. The company is slated to release results on Jan 18.
The Earnings ESP for BB&T Corporation (BBT - Free Report) is +1.37% and it carries a Zacks Rank #2. The company is scheduled to release results on Jan 19.
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