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Why Bank ETFs Can Continue to Rise Despite Mixed Q4 Earnings

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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. Things are pretty moderate so far, with two big banks crushing estimates on both lines, two reporting mixed results and two coming up with downbeat results. Trade war tensions and flattening of the yield curve were concerns for financial funds in the fourth quarter (read: Are Bank ETFs Good Buys Before Earnings Release?).

Let’s take a look at major banking earnings in detail:

Big Bank Earnings in Focus

JPMorgan (JPM - Free Report) reported earnings of $1.98 per share, missing the Zacks Consensus Estimate of $2.20 in the fourth quarter of 2017. The figure surged 85% from the prior-year quarter. Net revenues were $26.1 billion, up 7% from a year ago. The top line missed the Zacks Consensus Estimate of $26.7 billion on trading and underwriting woes.

Owing to a drop in expenses, Wells Fargo (WFC - Free Report) delivered a positive earnings surprise of 3.4% in fourth-quarter 2018. Earnings of $1.21 per share surpassed the Zacks Consensus Estimate of $1.17. Also, the bottom line compared favorably with $1.16 recorded in the prior-year quarter. The quarter’s total revenues came in at $21 billion, lagging the Zacks Consensus Estimate of $21.6 billion. Also, the top line compared unfavorably with the prior-year quarter figure of $22.1 billion.

Citigroup’s C adjusted net income per share of $1.61 for the quarter handily outpaced the Zacks Consensus Estimate of $1.55. Also, adjusted earnings climbed 26% year over year. Revenues were down 2% year over year to $17.1 billion in the reported quarter. The reported figure also missed the Zacks Consensus Estimate of $17.5 billion.

Bank of America’s (BAC - Free Report) fourth-quarter 2018 earnings were 70 cents per share handily outpaced the Zacks Consensus Estimate of 63 cents. Also, the figure was up 49% from the prior-year quarter (excluding the impact of the tax act). Net revenues amounted to $22.7 billion, which surpassed the Zacks Consensus Estimate of $22.2 billion. The reported figure was up 11% year over year.

Goldman Sachs’ (GS - Free Report) fourth-quarter 2018 results recorded a positive earnings surprise of 23.8%. The company reported earnings per share of $6.04, comfortably beating the Zacks Consensus Estimate of $4.88. The bottom line also compares favorably with adjusted earnings of $5.68 in the year-earlier quarter. Goldman’s net revenues were down 1% year over year to $8.1 billion in the quarter under review. However, the revenue figure handily outpaced the Zacks Consensus Estimate of $7.9 billion.

Morgan Stanley’s (MS - Free Report) fourth-quarter 2018 adjusted earnings of 73 cents per share, which lagged the Zacks Consensus Estimate of 90 cents. The figure also reflected a 13% decline from the prior-year quarter. Net revenues amounted to $8.54 billion, showing a decline of 10% from the prior-year quarter. In addition, the top line lagged the Zacks Consensus Estimate of $9.44 billion.

Market Impact

Against this backdrop, investors 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) , Invesco KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) responded to earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Goldman and Morgan Stanley are not that prominent in the afore-mentioned ETFs, rather they are heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) .

ETF Performance

Most of these ETFs gave decent performances in the last 10 days (as of Jan 22, 2019) in the peak of banking earnings releases. Dovish Fed minutes resulted in a steepening yield curve, which favored bank stocks. Goldman Sachs believes that bank shares will stay strong ahead as loans are growing at an accelerated pace. “Still-benign credit across all asset classes” and a charged-up capital market at the start of this year should work in favor of bank ETFs.

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