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Here's What to Expect from Major Banks on Q3 Earnings

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The earnings season is knocking at the door and investors must be interested in knowing how banks (one of the industries that have been in the spotlight for quite some time now) are likely to perform.

Will the major banks be able replicate first-half 2017 performance? Let’s check out how the factors have played out this time.

The Fed’s interest rate hike in June had full-quarter impact during the third quarter. Thus, the pressure on margins is expected to continue easing. Further, per the Fed’s latest data, loans continued to increase. Both consumer loans and commercial and industrial loans are projected to rise while commercial real estate loans might fall. So, interest income for banks is expected to improve marginally.

Typically, the third quarter is a seasonally weak period on the capital markets front, and it was not different this time. While debt underwriting continued to rise (mainly on assumption of persistent increase in interest rates) and fixed income trading flows were stable, slowdown in equity issuance, weak equity trading volumes and overall low volumes of M&As are expected to hurt fee income growth for banks to some extent.

On the cost front, as the majority of avoidable expenses have already been cut by banks, expense reduction will less likely be a big support. Also, as banks move toward improving their digital offerings, expenses are bound to marginally rise.

Per our latest Earnings Preview, Major Banks (accounting for nearly 45% of the Finance sector’s total earnings) is expected to witness a 5.1% year-over-year decline in earnings in the quarter. This compares unfavorably with the 10% growth witnessed in the prior quarter.

This week, four major banks are scheduled to announce their third-quarter results. Let’s have a closer look at what to expect.

Like always, JPMorgan Chase & Co. (JPM - Free Report) will kick-start earnings season for the major banks. The company is slated to announce results on Thursday, Oct 12 before the market opens. With a Zacks Rank #3 (Hold) and Earnings ESP of -0.53%, the chances of earnings beat in the to-be-reported quarter is less. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Sluggish trading activities during the quarter are expected to be a major undermining factor for JPMorgan. Trading revenues are projected to decrease 20% year over year as indicated by CEO Jamie Dimon. Though overall low volumes of M&A and equity issuance during the quarter will marginally hurt investment banking fees, higher debt origination is expected to be a saving grace. A slight improvement in lending activities along with higher interest rates is anticipated to result in an increase in interest income.

Notably, JPMorgan surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as shown in the chart below:

J P Morgan Chase & Co Price and EPS Surprise

 

J P Morgan Chase & Co Price and EPS Surprise | J P Morgan Chase & Co Quote


Another big bank, Citigroup Inc. (C - Free Report) , will also report earnings on Oct 12. Similar to JPMorgan, our quantitative model doesn’t point to an earnings beat this time. The company has Earnings ESP of -0.29% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Citigroup’s earnings are expected to be adversely impacted by a decline in trading income (down 15% year over year) and lower equity underwriting fees. Also, credit costs are anticipated to rise. However, improving interest income (driven by loan growth and higher interest rates) and an increase in debt underwriting fees will support bottom line.

Citigroup outpaced the Zacks Consensus Estimate in each of the trailing four quarters, as reflected in the chart below:

Citigroup Inc. Price and EPS Surprise

 

Citigroup Inc. Price and EPS Surprise | Citigroup Inc. Quote
 

Bank of America Corp. (BAC - Free Report) is scheduled to release third-quarter results on Friday, Oct 13, before the markets open. With a Zacks Rank #4 (Sell) and Earnings ESP of -0.66%, the chances of the bank beating the Zacks Consensus Estimate in the to-be-reported quarter is less.

Similar to other big banks, the company expects trading revenues to decline. Its chief financial officer, Paul Donofrio projected that the bank’s earnings in the quarter will be hit by a decline in trading income (down roughly 15% from the prior-year quarter). However, net interest income is expected to rise driven by modest growth in loans and deposits, partially offset by the adverse impact from the sale of non-U.S. consumer credit card operation.

Bank of America outpaced the Zacks Consensus Estimate in each of the trailing four quarters, as reflected in the chart below:

Bank of America Corporation Price and EPS Surprise

 

Bank of America Corporation Price and EPS Surprise | Bank of America Corporation Quote
 

On Friday, yet another big bank, Wells Fargo & Company (WFC - Free Report) , is also slated to announce results. With a Zacks Rank #4 and Earnings ESP of +0.03%, the chances of earnings beat in the to-be-reported quarter is less.

Mounting expenses (mainly due to elevated technology costs) and continual auto loan portfolio runoff are expected to dent the results. Also, litigation costs/provisions are projected to remain high as the bank continues to face accusations related to its sales practices. However, Wells Fargo will likely benefit from easing margin, loan growth and seasonally higher mortgage banking income to some extent.

Notably, the company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as shown in the chart below:

Wells Fargo & Company Price and EPS Surprise

 

Wells Fargo & Company Price and EPS Surprise | Wells Fargo & Company Quote
 

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