The first-quarter earnings season is already knocking at the doors with big names — JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) , Citigroup (C - Free Report) and PNC Financial (PNC - Free Report) — all reporting financial numbers tomorrow, before the opening bell.
After three straight quarters of muted activities, it appears that volatility is back in the markets, with extremity in February and March. The quarter witnessed investors’ anxiety on uncertainty over the number of rate hikes on upbeat economic numbers and rising inflation, which pulled the benchmark 10-year Treasury bond yields down. This reversed the uptrend experienced by banks since last September.
Moreover, Trump’s trade-tariff announcements on Chinese imports and a sharp sell-off in the tech sector affected the stock market rally in the quarter. All these activities indicate a favorable momentum on the capital markets aiding trading revenues, primarily for big banks.
Notably, the first-quarter earnings are expected to report decent numbers as compared with the last quarter (impacted by huge one-time charges related to the tax reform), with a rising interest-rate environment aiding net interest margins — the backbone for banks’ top-line growth.
In addition to the benefits from the rising interest rates, a moderate improvement in lending will likely energize interest income for banks. Per the Federal Reserve’s latest data, loans are predicted to improve slightly on a sequential basis in the to-be-reported quarter. Particularly, weakness in revolving home equity loans might offset growth in commercial and industrial (C&I), consumer and overall real estate loans, to some extent.
Mortgage business is anticipated to witness a slowdown in the first quarter. With interest rates moving higher, refinancing activities have been slowing down. Therefore, no major help is expected from this source.
The trend of earning solid advisory and underwriting fees for debt and equity issuance might reverse in the first quarter, as rising rates will limit corporates’ involvement in these activities. As debt-origination fees typically account for about half of total investment banking fees, this could deal a blow to the banks.
However, strong equity issuances globally might have got boosted from IPOs and follow-on offerings. So, equity underwriting fees are projected to escalate. Also, a potential rise in fees from increasing M&As in certain sectors will likely help banks garner advisory fees.
Further, credit quality is anticipated to remain strong, backed by an improving economy and conservative underwriting standards.
On the cost front, while the absence of considerable legal expenses since the last few quarters is encouraging, increased investments in technology to improve digital offerings might escalate costs moderately.
Per our latest Earnings Preview, overall earnings for the major banks in first-quarter 2018 are projected to rise 11.3% year over year.
Let’s take a look at the four major banks scheduled to announce results tomorrow.
JPMorgan will report the first-quarter earnings before the opening bell. Steady rise in net interest income and slowdown in mortgage banking is expected. Investment banking income is projected to remain stable or increase marginally year over year. Furthermore, with increased volatility during the quarter, management projects first-quarter market revenues to rise at a mid-to-high single-digit rate, on a year-over-year basis. Similar to the prior quarters, equity trading revenues are also expected to render support to the total trading revenues of this Zacks Rank #3 (Hold) stock. (Read more: Higher Trading & Rates to Support JPMorgan Q1 Earnings).
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 of 3 and Earnings ESP of +0.73%, the chances of a likely earnings beat in the quarter to be reported are bright. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Wells Fargo is likely to benefit from easing margin and high interest income, though marginally. Particularly, weakness in revolving home equity loans might offset growth in commercial and industrial (C&I), consumer and overall real estate loans to some extent. Nonetheless, mounting expenses, continual auto-loan portfolio runoff and low mortgage business are expected to dent the banking giant’s results. (Read more: Will Wells Fargo Q1 Earnings Overcome Legal Issues?).
Wells Fargo posted an average beat of 0.32% over the preceding four quarters, having beaten the Zacks Consensus Estimate in two of them, as demonstrated in the chart below:
For another big bank, Citigroup, we cannot conclusively predict an earnings beat in the quarter, as higher credit costs are likely to hurt its financials. Nonetheless, the company is anticipated to witness improvement in consumer banking revenues, while pressure on margins is likely to somewhat ease. Additionally, rebound in trading revenues is expected to act as a tailwind. (Read more: Will Citigroup Q1 Earnings Benefit From Trading Rebound?).
Further, this Zacks #3 Ranked stock surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as reflected in the chart below:
Likewise, we cannot conclusively predict earnings beat for PNC Financial in the first quarter, with an Earnings ESP of +0.00% and a Zacks Rank #3. Projected higher net-interest income and consumer loan growth will likely support earnings. In addition, an increase in fee income is estimated on equity underwriting business strength. However, the company is likely to continue witnessing lower mortgage revenues owing to slowdown in refinancing activities caused by rising interest rates. (Read more: Can Fee Income Growth Aid PNC Financial's Q1 Earnings?)
Having beaten estimates in each of the last four quarters, PNC Financial posted an average beat of 4.13%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Check later our full write-up on earnings releases of these stocks.
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