With fourth-quarter 2018 earnings beginning next week, all eyes will be on big banks’ financial performance. Though the operating environment was favorable at the beginning of the year, the trend reversed slightly in the last quarter.
Big banks have been struggling constantly over investors’ concerns related to the flattening of the yield curve and increase in deposit betas. As such, improvement in net interest margin (one of the key metrics for gauging banks’ profitability) is expected to be subdued in the fourth quarter despite rise in interest rates.
Nonetheless, a decent lending backdrop, particularly in the areas of commercial and industrial, commercial real estate and consumer will offer support to banks’ interest income while weakness in revolving home equity loans (due to slowdown in originations as well as refinancing activities) will partially offset this.
Additionally, the fourth quarter witnessed heightened volatility, specially in December. This resulted in a rise in client activity and thus trading business is expected to report decent numbers. Further, seasonality, fears of global economic slowdown, increased volatility and rise in interest rates hurt investment banking revenues in the to-be-reported quarter.
On the cost front, increased investments in technology to boost digital offerings and initiatives to expand into newer areas are expected to result in a slight rise in expenses. But, increase in overall operating expenses is likely to be manageable. Similar to the first three quarters of 2018, lower tax rates will support bottom-line growth in the fourth quarter.
Therefore, based on the above-mentioned operating backdrop and expectations, let’s check how the big banks are expected to perform in the last quarter of 2018.
This time, Citigroup (C - Free Report) will kick off the earnings season for the banking sector. The bank is scheduled to report results on Jan 14, before the markets open. With a Zacks Rank #3 (Hold) and Earnings ESP of -1.54%, the chances of the company beating the Zacks Consensus Estimate is low this time around.
(You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.)
Citigroup’s consumer banking business is expected to put up an impressive performance in the October-December quarter. Further, the company is expected to record decent net interest income (NII) growth driven by modest loan growth and rise in interest rates. However, fixed income market revenues will likely be low on a year-over-year basis. Also, investment banking performance is likely to remain dismal. (Read more: Muted Market Revenues to Hurt Citigroup's Q4 Earnings)
Notably, Citigroup surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as shown in the chart below:
JPMorgan (JPM - Free Report) will report fourth-quarter results on Jan 15 before the opening bell. Decent trading activities, higher rates and modest loan growth will likely aid the company’s revenues. However, weak investment banking performance and dismal mortgage banking are expected to hamper growth to some extent.
Also, the company is expected to witness a rise in expenses as investments in technology upgrades and branch expansion efforts continue. (Read more: Trading, Loan Growth to Support JPMorgan Q4 Earnings)
Nonetheless, JPMorgan is likely to beat the Zacks Consensus Estimate in the to-be-reported quarter. The company has Earnings ESP of +0.03% and Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similar to Citigroup, JPMorgan surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as shown in the chart below:
Another big bank, Wells Fargo (WFC - Free Report) is also slated to announce fourth-quarter results on Jan 15. The bank’s revenues are expected to remain under pressure mainly due to lower mortgage banking income and overall soft loan demand.
Also, past business misconducts are expected to hurt growth. Nonetheless, operating expenses are expected to remain stable in the to-be-reported quarter. (Read more: Can Wells Fargo's Q4 Earnings Brave Mortgage Weakness?)
Further, chances of Wells Fargo beating the Zacks Consensus Estimate are less this time with Earnings ESP of -3.19% and Zacks Rank #3. Also, the bank doesn’t have an impressive earnings surprise history. The company surpassed the Zacks Consensus Estimate in only one of the trailing four quarters.
Last but not the least, Bank of America (BAC - Free Report) is scheduled to report on Jan 16, before the market opens. The bank is expected to report a rise in trading revenues and decent growth in NII (supported by loan growth and rise in rates). However, muted investment banking and mortgage banking performance and increase in expenses are on the downside.
With a Zacks Rank #3 and Earnings ESP of -1.06%, the chances of the company beating the Zacks Consensus Estimate is low this time around. (Read more: Trading, Loans, Higher Rates to Aid BofA’s Q4 Earnings)
The company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as shown in the chart below:
Check back later for our full write-up on earnings releases of these stocks.
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