This Friday will kickoff the second quarter earnings session, while three of the countries biggest banks will report their earnings, and analysts are expecting the reports to be stellar. They are expecting a repeat of the first quarter, in which the banks reported record earnings gains.
This report comes against the backdrop of a flattening yield curve, however, we still aren’t certain that strong earning results will correlate to reviving stock prices that have been under performing in the broader market since February. Directly following the initial relief of tax revamps, expected deregulation’s and the strong economy, which has now began to fade.
“Many bull thesis drivers were baked-in and the flatter curve and tariff concerns have led to a de-rating.” said Jefferies analyst Ken Usdin. “Rising rates will continue to help, but deposit costs are rising faster and loan growth needs to step up.” (Source: Marketwatch.com “Bank earnings are expected to shine, but their stocks may not”)
While yields on the short end of the curve have continued to steadily climb, while the Federal Reserve telegraphs its planned interest rates hikes. Yields on the long end of the curve are flat or falling, raising the probability of an inverted yield curve,which is typically an indicator of a recession. However, even if a recession isn’t in our future, some are still concerned that banks will still not be able to benefit enough from the rising difference between what they pay depositors, and what they charge for loans.
“If the yield curve inverts, we expect bank loan growth to slow, as more borrowers shift to terming out their financing with longer term fixed rate loans, rather than shorter-term variable priced commercial and industrial loans,” said Morgan Stanley analyst Betsy Graseck. “The caveat is whether spreads expand, making borrowing in hte capital markets too expensive, which could then slow and potentially shirnk corporate leverage.”
The banks are expected to report strong trading revenues on Friday, given the high amount of volatility in the market during this climate. JP Morgan Chase -0.29%, Citigroup Inc -1.15% and Wells Fargo Co -0.3% are set to report on Friday. They will be followed by Bank of America Corp -0.76% reporting on Monday and Goldman Sachs Group Inc -0.64% on Tuesday with Morgan Stanley -0.35% reporting on Wednesday.
JP Morgan Chase is expected to report earnings of $2.22 a share, which is up from $1.82 a share a year ago. They are also expected to report a revenue of $27.824 billion, while exceeding estimates for EPS for the past 13 quarters. They have also beaten revenue estimates for the last 10 quarters.
Citigroup is expected to report EPS of $1.56 up from $1.24 a year ago. They are also expected to report a revenue of $18.516 billion, up from 17.901 billion last year. Citi has also beaten EPS estimates of the last 13 quarters, and has exceeded revenue estimates for the last 5 quarters.
Wells Fargo is expected to report EPS of $1.12 up from $1.07 last year. Meanwhile, they are expected to report a revenue of $21.697 billion, which is down from last years $22.169 billion. Wells Fargo has missed EPS estimates three consecutive times in a row in the last 6 quarters, and has lagged revenue estimates for 5 of the 6 quarters.