The earnings season is just around the corner and investors are keen to see if major banks can replicate or beat their solid first-half 2018 financial performance.
Major bank stocks have been struggling constantly over investors’ concerns related to the flattening of the yield curve and increase in deposit betas. As such, net interest margin (one of the key metrics for gauging banks’ profitability) is expected to be subdued in the third quarter despite rise in interest rates (in June and September).
Additionally, disappointing performance of capital markets is a matter of concern. Seasonality, low client activities, further escalation in the trade war and rise in interest rates are major factors impacting capital markets-related businesses. Therefore, low volatility will likely affect trading revenues (one of the main supporting factors during the first half) in the third quarter.
Also, growth in investment banking fees (basically comprising underwriting revenues and advisory fees) is expected to be muted in the to-be-reported quarter. Nevertheless, some respite is expected in advisory business as the strong M&A pipeline from the prior quarters will likely offset decline in global M&A deal volume in the third quarter.
Dismal mortgage banking performance is also expected to continue in the quarter amid rising interest rates, which have made homes less affordable as mortgage rates increased. This, in turn, slowed down originations as well as refinancing activities.
Nonetheless, a decent lending backdrop, particularly in the areas of commercial and industrial, and consumer will offer support to major banks’ interest income while weakness in revolving home equity loans will partially offset this.
Further, overall asset quality is anticipated to remain strong, backed by an improving economy and conservative underwriting standards, while delinquency rates related to consumer loans will likely rise.
Increased investment in technology to strengthen digital offerings and initiatives to expand into newer areas are expected to result in a slight rise in expenses. But, increase in overall non-operating expenses is likely to be manageable.
Similar to the first half, lower tax rates will support bottom-line growth in the third quarter.
Major banks on the S&P 500 Index (accounting for nearly 45% of the Zacks Finance sector's total earnings) are expected to witness 9.3% year-over-year earnings growth in the to-be-reported quarter. Yet, this compares unfavorably with 17% growth recorded in the prior quarter.
(For detailed look at the earnings outlook for this industry and others, please read our Earnings Outlook article).
Choosing the Potential Winners
While all major banks may not report impressive third-quarter results, there are still a few that are expected to outshine their peers. So, this is the right time for you to select those, which are poised to beat earnings estimates in their upcoming releases.
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Major Banks Set for Earnings Surprises
Here are five major bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
Wells Fargo (WFC - Free Report) is slated to release results on Oct 12. The company has an Earnings ESP of +0.21% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Earnings ESP for Comerica Incorporated (CMA - Free Report) is +0.49% and it carries a Zacks Rank of 3. The company is scheduled to release results on Oct 16.
M&T Bank Corporation (MTB - Free Report) has an Earnings ESP of +0.41% and carries a Zacks Rank of 2. It is slated to report results on Oct 17.
The Bank of New York Mellon Corporation (BK - Free Report) is scheduled to release results on Oct 18. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.03%.
The Earnings ESP for State Street (STT - Free Report) is +0.25% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 19.
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