With the Q4 earnings season almost here, investors are eagerly waiting for the results of the mega banks, which remained in the spotlight throughout the quarter for a number of reasons.
Major banks’ performance is expected to be decent this time. A stable and moderately growing U.S. economy is anticipated to have driven loan growth. Per the Fed’s latest data, though weakness in revolving home equity loans and commercial and industrial (C&I) is likely to have persisted, consumer and commercial real estate loan growth might have been an offsetting factor.
However, the Federal Reserve’s accommodative monetary-policy stance, with decline in interest rates (three rate cuts in July, September and October), and its impact on the yield curve are likely to have dampened banks’ net interest margins (one of the key metrics for gauging banks’ profitability) in the to-be-reported quarter.
Mortgage banking business is expected to have provided some support to banks’ fee income. While concerns like muted home equity loan growth and heightening competition continue to hurt mortgage banking fees, lower mortgage rates, which drove the refinancing activities, are expected to have partially negated these woes.
On the trading front, rise in client activities are projected to have driven trading revenues. During the fourth quarter, the Federal Reserve’s accommodative stance, uncertainty related to the U.S.-China trade war and Brexit, expectations of global economic slowdown and a number of activities toward the tail end of the quarter kept trading desks moving.
Though the number of closed deals declined during the quarter, a higher number of announced M&As indicate a strong pipeline. Further, global deal value seems to have shrunken as well. Thus, advisory fees are likely to have been negatively impacted.
Meanwhile, solid equity markets performance and the central banks’ accommodative stance drove corporates to issue equities across the globe. Moreover, bond issuance volumes were strong, while debt issuances were muted as corporate loan demand was soft. Hence, growth in equity underwriting fees and debt origination fees are expected to have been decent in the December-end quarter.
Expense reduction, which helped banks remain profitable, is unlikely to have provided much support, as these companies had already slashed the majority of unnecessary expenses. While the absence of considerable legal expenses over the last few quarters is encouraging, increased investments in technology to improve digital offerings as well as starve off competition from FinTech firms might have escalated costs moderately.
In the S&P 500 universe, the Zacks Finance sector’s total earnings, of which major banks account for nearly 45%, are projected to have been up 7.7% year over year in the quarter to be reported. This comes in higher than 3.2% growth recorded in the third quarter.
(For detailed look at the earnings outlook for this industry and others, please read our Earnings Outlook article.)
Selecting the Winners
This is the right time for you to select some banking stocks that are well positioned 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 regional bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
PNC Financial (PNC - Free Report) is set to report earnings on Jan 15. The company has an Earnings ESP of +0.36% and currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Earnings ESP for Bank of America (BAC - Free Report) is +0.13% and the stock carries a Zacks Rank of 2, at present. The company is scheduled to release quarterly figures on Jan 15.
State Street Corporation (STT - Free Report) has an Earnings ESP of +0.29% and currently sports a Zacks Rank of 1. It is slated to report results on Jan 17.
Goldman Sachs (GS - Free Report) is scheduled to release results on Jan 15. The company, which currently carries a Zacks Rank of 3, has an Earnings ESP of +1.34%.
The Earnings ESP for The Bank of New York Mellon Corporation (BK - Free Report) is +0.36% and it holds a Zacks Rank of 3, at present. The company is set to report quarterly numbers on Jan 16.
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