The fourth-quarter earnings season is already knocking at the doors with big names — JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and The PNC Financial Services Group, Inc. (PNC - Free Report) — all reporting financial numbers tomorrow, before the opening bell.
In 2017, several political and geopolitical developments, interest-rate hikes, tax act movements and absence of any significant progress on the regulatory reforms proposed by the Trump administration should have driven volatility. However, subdued inflation in the United States and marginal increase in long-term interest rates, along with absence of positive catalysts, have been on the downside.
Notably, the U.S. corporate tax overhaul is expected to hurt earnings in the fourth quarter on one-time charge related to cash repatriation and write-down of deferred tax assets (DTAs).
Per the Federal Reserve’s latest data, loans are expected to be in line on a sequential basis during the to-be-reported quarter. Particularly, weakness in commercial and industrial (C&I) loan growth might be offset by rising consumer loans. Therefore, interest income for banks is likely to improve marginally.
Credit quality is anticipated to remain strong, backed by an improving economy and conservative underwriting standards. Though a continued momentum in investment banking business is anticipated to support bottom-line numbers, banks might remain under pressure due to lackluster fixed-income trading activities on low volatility during the quarter.
Strong advisory and underwriting fees on the back of higher debt origination and equity issuances are likely to provide a boost to the banks’ top lines. As the interest-rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. Therefore, debt origination fees will lead to solid gains.
Also, despite being a seasonally weak quarter for equity issuances globally, fourth-quarter 2017 turned triumphant. Strong rally in the equity markets across the globe might have boosted IPOs and follow-on offerings. So, the related fees are projected to increase for banks.
On the cost front, banks might record marginally higher expense level due to digitization. Further, the recent tax reform is likely to result in elevated operating expenses from one-time bonus payments, higher charitable contributions and investment losses from securities portfolio restructurings.
Per our latest Earnings Preview, overall earnings for the major banks in fourth-quarter 2017 are projected to rise 2.8% year over year.
Nonetheless, there might be a surprise in store for major banking stocks this earnings season. Let’s take a look at the three major banks scheduled to announce results tomorrow.
JPMorgan will report the fourth-quarter earnings before the opening bell. With a Zacks Rank #3 (Hold) and Earnings ESP of 0.00%, we are unable to conclusively predict an earnings beat in the quarter to be reported. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Steady rise in net interest income and slowdown in mortgage banking due to seasonality is expected. Investment banking income is projected to be up in the high-single-digits range for the fourth quarter. Nevertheless, weak trading activities and the company’s expectation of one-time charge related to cash repatriation to be more than $2 billion due to the U.S. corporate tax overhaul is likely to be major drag. (Read more: Can JPMorgan's Q4 Earnings Brave Trading Slump?).
Notably, JPMorgan surpassed the Zacks Consensus Estimate in all the trailing four quarters, as shown in the chart below:
On Friday, yet another big bank, Wells Fargo, is also slated to announce results. With a Zacks Rank #3 and Earnings ESP of +0.76%, the chances of a likely earnings beat in the to-be-reported quarter are bright. Wells Fargo is likely to benefit from easing margin and high interest income, though marginally. Particularly, weakness in commercial and industrial (C&I) loan growth might be offset by rising consumer loans. Nonetheless, mounting expenses, continual auto loan portfolio runoff and low mortgage business due to seasonality are expected to dent the banking giant’s results. Furthermore, though the company has not provided any information about the write-down of deferred tax assets (DTAs), it might record a significant one-time charge in the quarter. (Read more: Can Wells Fargo Q4 Earnings Hide Mortgage Weakness?).
Wells Fargo posted an average beat of 2.75% for the preceding four quarters, having beaten the Zacks Consensus Estimate in three of them, as demonstrated in the chart below:
Likewise PNC Financial is also likely to beat the Zacks Consensus Estimate in the fourth quarter, with an Earnings ESP of +0.41% and a Zacks Rank #1 (Strong Buy). Expected higher net-interest income and consumer loan growth are anticipated to support earnings. Management projects its net interest income for the quarter under review to increase in low-single digits on a sequential basis. Moreover, an increase in fee income is estimated on investment banking and underwriting business strength. However, one-time restructuring expenses due to the tax reform might be on the downside. (Read more: Why Earnings Beat is Likely for PNC Financial in Q4).
PNC Financial posted an average beat of 4.58% for the last four quarters, having beaten the Zacks Consensus Estimate in each of them.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Check later our full write-up on earnings releases of these stocks.
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