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Big Banks Forecast Lackluster Q2 Guidance, Muted Trading

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On Wednesday, at the 2018 Deutsche Bank Eighth Annual Global Financial Services Conference in New York, top executives of Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) hinted at the companies’ Q2 outlook.

At the conference, Brian Moynihan — chief executive officer at BofA — stated that the company’s trading income is projected to be flat year over year in the second quarter, however things might turn around, depending on activities in June. Furthermore, the bank is likely to continue to benefit from disposing excess capital using share buybacks.

Further, per Wells Fargo’s CFO John Shrewsberry, the ongoing review process of the bank related to the sales practices issues is "virtually complete" and the company has shared all relevant information with investors.

"I don't think at this point that there's anything meaningful that we aren't already talking about," Shrewsberry said at the conference. Overall, the bank has succeeded in maintaining established customers, "we haven't sold or deepened relationships as rapidly as we thought we would in terms of a recovery," Shrewsberry added.

Commenting on commercial loan, the bank foresees demand to remain below expectations for 2018, despite anticipated business optimism following the U.S. tax reform.

At the same conference on Tuesday, JPMorgan’s (JPM - Free Report) head of corporate and investment banking — Daniel Pinto — announced the company’s latest outlook for the second quarter.

“Overall, markets revenue as we see it today will be flat year on year,” Pinto said. “The core activities will be up let's say mid single digits. Then we have a series of one-offs that overall take that back down to flat,” Pinto had noted.

Additionally, though the bank is performing well in rates, commodities and corporate credit business, a quarterly charge of $100 million associated with the tax-oriented investment unit of its fixed income division will likely be recorded, Pinto had mentioned further. Moreover, investment banking business momentum is likely to continue.

Meanwhile, concerns increased for investment bank — Morgan Stanley (MS - Free Report) — over challenging business conditions in the ongoing quarter, which are affecting its wealth management unit. This unit, particularly, generates half of the bank's revenues.

During the conference, Andy Saperstein, co-head of the bank's wealth management division, stated that sluggish client activity in the months of March, April and May, has dampened Morgan Stanley’s retail transaction revenues.

Furthermore, pricing of fee-based accounts is related to market prices on the last day of the previous quarter. The market was tumbling at the end of Q1, giving rise to low pricing of those accounts, thereby, hitting Morgan Stanley’s performance.

Conclusion

The January-March 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 rally experienced by bank stocks, since last September, to some extent. In addition, Trump’s trade-tariff announcements on Chinese imports thwarted the stock market rally in Q1.

After three straight quarters of muted activities, it appeared that volatility was back in the markets, with extremity in February and March. This indicated higher trading activities and increased trading revenues, primarily for big banks.

Nonetheless, banks are skeptical for the second quarter on global market turmoil and uncertainty of markets on the ongoing developments, including easing of regulations.

Notably, shares of BofA and JPMorgan inched up 4.9% and 3.4%, respectively, while shares of Wells Fargo and Morgan Stanley declined 3.5% and 1.9%, respectively, over the last six months.


 

Among the above-mentioned stocks, Wells Fargo, BofA and JPMorgan currently carry a Zacks Rank #3 (Hold), while Morgan Stanley carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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