Big U.S. banks are expected to see a feeble start to the earnings season this week. And it’s primarily because of the Fed trimming interest rates three times last year after nine hikes in the previous three-year period. Drop in business investments, consistently low inflation and trade-related issues were cited as the reasons behind the rate cuts. At the same time, President Trump wanted the Fed to slash rates more aggressively, thanks to record-low unemployment levels.
Decline in interest rates nonetheless adversely impact net interest margins. Needless to say, a bank’s profit margin depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.
For fourth-quarter earnings, the Major Banks industry, including JPMorgan and Wells Fargo, is expected to see an earnings decline of 9.6% from the same period last year despite 1.4% higher revenues (read more: Can Earnings Reports Push Bank Stocks Even Higher?).
But not everything has been gloomy for banks in the fourth quarter. After all, declining interest rates sometimes tend to do well for banks, fueling demand for loans. And if we look into the non-interest income side, revenues should increase as banks continue to expand wealth management and consumer lending businesses.
Housing and car loans have increased considerably, thanks to lower interest rates. Lenders made $700 billion in mortgages in the third quarter, fueled by customers’ rush to refinance. And such a hot streak is expected to have remained intact in the fourth quarter, especially due to low mortgage rates. Per Freddie Mac, the average rate for a 30-year fixed mortgage dropped to 3.64% last week, its lowest level 13 weeks. By the way, the Fed recently said that large banks’ loans to consumers have increased 11.9% in the fourth quarter compared to the same period last year.
Quarterly investment banking revenues in 2018 were dismal. But this time around, it is certainly expected to improve, as trading revenues continue to expand across the banking segment. Banks have trimmed costs and competed fiercely for clients in the trading segment. Citigroup expects year-over-year trading revenues to climb in the “high teens,”, while Bank of America anticipates high single digits.
Another factor that should have boosted bank earnings in the fourth quarter is buybacks. Per the S&P Dow Jones Indices, major banks including Bank of America, Wells Fargo and JPMorgan bought their own shares in the S&P 500 in the third quarter. And the trend is expected to have continued in the fourth quarter. Buybacks, no doubt, bode well since by repurchasing shares the company can use the extra cash to reward shareholders.
Partly because of the buybacks, banks had a strong run last year. Shares of JPMorgan, Bank of America and Citigroup rose more than 30% over the past year, beating the broader market. Take a look —
4 Bank Stocks to Win Big Heading Into Q4 Earnings
The aforesaid factors are sure to help a few banks stay afloat this earnings season. This calls for investing in such banks, which are expected to report a significant uptick in fourth-quarter earnings. These stocks flaunt a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Bank of America Corporation (BAC - Free Report) provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments. The company is expected to report earnings results for the quarter ending December 2019 on Jan 15. Bank of America has an Earnings ESP of +0.13%. The company’s expected earnings growth rate for the next quarter and current year is 4.3% and 3.5%, respectively. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The PNC Financial Services Group, Inc. (PNC - Free Report) operates as a diversified financial services company in the United States. The Corporate & Institutional Banking segment in particular provides secured and unsecured loans. The company is expected to report earnings results for the quarter ending December 2019 on Jan 15. PNC Financial Services has an Earnings ESP of +0.36%. The company’s expected earnings growth rate for the current quarter and year is 6.2% and 5.9%, respectively. The stock has a Zacks Rank #2.
State Street Corporation (STT - Free Report) provides a range of financial products and services to institutional investors. The company is expected to report earnings results for the quarter ending December 2019 on Jan 17. State Street has an Earnings ESP of +0.29%. The company’s expected earnings growth rate for the next quarter is 10.5%. The stock has a Zacks Rank #1.
Bank of Hawaii Corporation (BOH - Free Report) operates as the bank holding company for Bank of Hawaii that provides financial products and services in Hawaii, Guam, and other Pacific Islands. The company is expected to report earnings results for the quarter ending December 2019 on Jan 15. Bank of Hawaii has an Earnings ESP of +0.37%. The company’s expected earnings growth rate for the current quarter and year is 4.6% and 4.4%, respectively. The stock has a Zacks Rank #2.
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