Bank Earnings: Why This Time Is Different -- Ahead of the Tape
January 12 2017 - 12:45PM
Dow Jones News
By Aaron Back
Things feel different as U.S. banks gear up for another
quarterly earnings season. For the first time in years, they face
lofty expectations.
Bank of America, J.P. Morgan Chase, and Wells Fargo all report
fourth-quarter earnings on Friday. Since the presidential election,
their shares have been bid up by 25% on average as of midday
Thursday. That means caution is warranted heading into earnings,
but short-term choppiness shouldn't obscure a solid investment
case.
Analysts expect per-share earnings in the period to rise by 36%
from a year earlier at Bank of America, one the biggest
beneficiaries of higher interest rates. They see earnings rising
7.6% at J.P. Morgan Chase and falling 2.9% at Wells Fargo, which
benefits less than others from rising rates.
Even more important will be the banks' forecasts for 2017 and
their commentary on the many trends expected to benefit them under
a Trump administration. Besides higher interest rates, this
includes expectations for financial deregulation, faster capital
returns, lower taxes and more trading activity.
Little of this is knowable, much less quantifiable, at this
point, but bank forecasts are worth watching in two particular
areas.
On interest rates, many banks have outlined how much extra
interest income they would earn if rates shoot upward across the
board. Now they may begin to offer cautionary statements on
offsetting effects, such as write-downs on securities and higher
loan losses. Banks also could be more specific on their exposure to
moves in short- versus long-term rates.
Trading activity is the second major variable to watch. This
surged in the second half of 2016 after years of declines on events
like Brexit and the U.S. election.
Investors will want to hear if banks expect this bump to fade
away. Higher growth in the U.S., further Federal Reserve
tightening, and continued uncertainty over Brexit could be a recipe
for elevated trading volumes for some time.
The three banks reporting Friday now fetch an average of 14
times estimated 2017 earnings, compared with an average forward
multiple of 11 times over the past five years, leaving their shares
vulnerable to profit-taking if the news Friday is mixed. Bearish
options bets on financial stocks have risen also in recent weeks,
setting the stage for possible volatility.
But trends in rates and trading, to say nothing of Donald
Trump's policies, are likely to support bank valuations for the
foreseeable future.
(END) Dow Jones Newswires
January 12, 2017 12:30 ET (17:30 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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