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Inside Q4 Earnings Performance of Banking ETFs

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The financial sector, which accounts for around one-fifth of the S&P 500 index, is now busy with Q4 earnings releases. The going is good so far, with five big banks crushing estimates on both lines and Wells Fargo missing on both.

The Zacks Sector Rank for some top banks is in the top 6% while the Zacks Industry Rank is in the top 15%. The uptrend in the benchmark U.S. Treasury yields in recent times thanks to a hawkish Fed, Trump’s tax reform and U.S. economic growth momentum are the other positives for the banking sector. Let’s take a look at banking earnings in detail:

Big Bank Earnings in Focus

Strong investment banking results and higher rates drove JPMorgan’s (JPM - Free Report) fourth-quarter 2017 earnings of $1.76 per share, which handily surpassed the Zacks Consensus Estimate of $1.69. Solid loan growth (driven mainly by improved credit card loans) and higher interest rates supported net interest income growth. Further, rise in investment banking fees and stable equity trading income supported the top line. Managed net revenues of $25.5 billion in the quarter were up 5% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $25 billion.

Citigroup Inc. (C - Free Report) delivered a positive earnings surprise of 7.6% in fourth-quarter 2017 on prudent expense management and strong consumer banking. Adjusted earnings per share of $1.28 for the quarter easily outpaced the Zacks Consensus Estimate of $1.19. Also, earnings compared favorably with the year-ago figure of $1.14 per share. Revenues inched up 1% year over year to $17.3 billion in the reported quarter. The revenue figure also surpassed the Zacks Consensus Estimate of $17.1 billion.

Wells Fargo & Company’s (WFC - Free Report) fourth-quarter 2017 adjusted earnings of 97 cents per share improved from the prior-year quarter earnings of $0.96 but fell short of the Zacks Consensus Estimate of $1.04. The quarter’s total revenues were $22.1 billion, which lagged the Zacks Consensus Estimate of $22.4 billion. However, the figure compared favorably with the prior-year quarter tally of $21.6 billion.

Despite weak fixed income trading revenues, The Goldman Sachs Group Inc.’s (GS - Free Report) fourth-quarter 2017 results recorded a positive earnings surprise of 15.9%. The company reported adjusted earnings per share of $5.68, comfortably beating the Zacks Consensus Estimate of $4.90. Further, the bottom line witnessed 11.8% year-over-year improvement.

Though fixed-income trading activities were a drag in the fourth quarter, continued momentum in investment banking business supported the bottom line. Goldman’s net revenues were down 4% year over year to $7.8 billion in the quarter under review. However, the figure handily outpaced the Zacks Consensus Estimate of $7.6 billion. The stock has a Zacks Rank #3 (Hold). Zacks Industry Rank of the stock is in the top 15%.

Despite the trading slump, loan growth and impressive investment banking performance drove Bank of America’s (BAC - Free Report) fourth-quarter 2017 earnings of 47 cents per share, which outpaced the Zacks Consensus Estimate of 44 cents. Also, the figure was 21% higher than the prior-year quarter. Notably, the results exclude a one-time charge of 27 cents related to the tax act.

A fall in fixed income trading revenues (as expected) and mortgage banking losses were outweighed by strong net interest income growth (driven by loan growth and higher interest rates), stable equity trading income and higher investment banking fees. Adjusted net revenues amounted to $21.4 billion, marginally above the Zacks Consensus Estimate of $21.3 billion. Also, it was up nearly 7% from the prior-year quarter.

Higher interest income and improvement in underwriting fees drove Morgan Stanley’s (MS - Free Report) fourth-quarter 2017 adjusted earnings of 84 cents per share, which handily outpaced the Zacks Consensus Estimate of 77 cents. The reported figure was 14% above the prior-year quarter. Net revenues amounted to $9.5 billion, a rise of 5% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion.

Market Impact

Investors, who have their hopes pinned on an upbeat 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.

These ETFs gained in the last five days (as of Jan 19, 2018) — in the peak of the earnings season — in the range of 0.9% to 1.2%.

What Lies Ahead?

The yield on the 10-year note is on a northbound march and touched a three-year high last week. The trend is going to be same in the coming days. This should benefit banks’ future net interest income (read: BlackRock Results Boosted by Strong ETF Inflows).

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