The financial sector, which accounts for around one-fifth of the S&P 500 index, is now busy with Q1 earnings releases. The going is good so far, with four big banks crushing estimates on both lines, one reporting mixed results and Goldman falling shy of both counts.
The Zacks Sector Rank for banks is in the top 31% and Industry Rank is in the top 26%. The backdrop should favor the banks along with the course of oil, the stance of the Fed and proposed policies of Trump.
However, the downtrend in the benchmark U.S. Treasury yields since mid-March thanks to a dovish Fed rate hike outlook and geopolitical risks is a concern for the banking sector. Let’s take a look at banking earnings in detail:
Big Bank Earnings in Focus
JP Morgan (JPM - Free Report) reported earnings of $1.65 per share beating the Zacks Consensus Estimate of $1.51 in the first quarter of 2017. Also, the figure reflected a 22% rise from the year-ago period. Notably, the results included a legal charge of $218 million and a tax benefit of $373 million.
Managed net revenue of $25.6 billion in the quarter was up 6% year over year. Also, it compared favorably with the Zacks Consensus Estimate of $24.6 billion. Improved fixed income and equity trading, as well as solid activity in investment banking, boosted results.
Wells Fargo (WFC - Free Report) earned $1.00 per share in Q1, beating the Zacks Consensus Estimate by $0.03. Moreover, the figure compared favorably with the prior-year quarter’s earnings of $0.99 per share. The quarter’s total revenue of $22.0 billion lagged the Zacks Consensus Estimate of $22.1 billion. Revenues were in line on a year-over-year basis.
Citigroup Inc.’s (C - Free Report) earnings per share of $1.35 for Q1 were ahead of the Zacks Consensus Estimate of $1.24. Notably, results reflect one-time adjustments of a penny. Earnings compared favorably with the year-ago figure of $1.10 per share. Revenues increased 3% year over year to $18.12 billion, surpassing the Zacks Consensus Estimate of $17.81 billion. Higher revenues in the institutional clients group and global consumer banking were partially offset by a decline in corporate/other revenues.
Bank of America Corporation’s (BAC - Free Report) first-quarter 2017 earnings of $0.41 per share surpassed the Zacks Consensus Estimate of $0.35. Also, the figure was 46% higher than the prior-year quarter number. Net revenue came in at $22.4 billion, up 7% from the prior-year quarter and beat the Zacks Consensus Estimate of $21.5 billion.
Goldman (GS - Free Report) earned $5.15 per share in Q1, missing the Zacks Consensus Estimate of $5.38. Goldman’s strong area – trading in fixed income, currencies and commodities (FICC) – actually let it down. The segment was flat in Q1 while other banks flaunted considerable expansion. Goldman’s net revenue climbed 27% year over year to $8.0 billion in the quarter under review. However, revenues lagged the Zacks Consensus Estimate of $8.4 billion. The stock lost 5.4% in the two trading sessions after earnings.
Morgan Stanley’s (MS - Free Report) first-quarter 2017 earnings from continuing operations of $1.00 per share beat the Zacks Consensus Estimate of $0.90. Further, earnings skyrocketed 82% year over year. Shares were largely driven by a massive rise in fixed-income, currency and commodities (“FICC”) trading income and higher investment banking fees (read: Forget TIPs, Buy These Bond ETFs Instead).
In fact, Morgan Stanley’s bond traders surpassed Goldman for the first time since 2011. Net revenue amounted to $9.7 billion, marking a year-over-year rise of 25%. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion. The stock was up about 2% in the key trading session post earnings.
Investors, who have still pinned their hopes on a moderate earnings season, Trump’s promises for deregulation and faster Fed policy tightening, must be keen on knowing how financial ETFs like 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) responded to the earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).
All these ETFs slipped in the last five days (as of April 19, 2017) – in the peak of the earnings season. Goldman has moderate exposure in the afore-mentioned ETFs, rather it is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) , which shed over 0.7% in the last five days (as of April 19, 2017).
Everything depends on whetherthe OPEC output cut deal is extended, treasury yields rise and the Trump rally resumes. U.S. banks have significant exposure to the long-beleaguered energy sector. If oil prices stabilize despite surging U.S. output, tension over credit default will diminish (read: 4 Reasons to Buy Energy ETFs Despite Surging U.S. Output).
On the positive side, the finance sector’s earnings are expected to be up 14.6% on 2.9% higher revenues, as per the Earnings Trends issued on April 19, 2017. So, one can easily forget the Goldman woes and bet on the prospects of the sector with the financial ETFs in focus.
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