INSUBCONTINENT EXCLUSIVE:
Investors will focus on falling profits, a more dovish Federal Reserve and lower interest rates as major US banks kick off what analysts
expect to be the first quarter of contracting corporate earnings since 2016.
On Friday, April 12, JPMorgan Chase Co and Wells Fargo Co
will post results to begin the earnings season in earnest
Citigroup Inc and Goldman Sachs Group Inc will report the following Monday, followed by Bank of America Corp and Morgan Stanley on
Tuesday.
In the wake of the Federal Reserve's cautious shift due to signs of softness in the US economy and the subsequent drop in 10-year
Treasury yields, SP 500 banks are seen posting year-on-year first-quarter earnings growth of 2.3 per cent, down from 8.2 per cent forecast
six months ago, according to Refinitiv data.
"The Fed pivoted so abruptly, which gives one pause about what they're saying about the
economy," said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana
"Flat to falling interest rates are not good news for bank interest margins
It's not surprising that analysts are taking down earnings estimates."
The central bank's change in tack put the brakes on what had been
a pattern of quarterly rate hikes, amid signs of slowing economic growth.
Slowdown jitters have also hit 10-year Treasury yields
The benchmark bond's yield hit a 15-month low in the first quarter, flattening the yield curve and narrowing the gap between the interest
banks pay depositors and the interest they charge consumers, which is bad news for profits.
"That's why the estimates are going down,"
"(Analysts are) fearful of interest margins for banks and there's an underlying concern about loan growth."
In the first three months of
the year, the SP 500 bounced back from a sell-off in December, gaining 13.1 per cent, its biggest quarterly increase since 2009
But financials underperformed the wider market, gaining 7.9 per cent in the quarter as the new low-interest-rate normal that boosted other
sectors was a headwind for banks.
Since October, analysts have drastically lowered their expectations for SP 500 earnings in 2019, with
first-quarter estimates dropping from 8.1 per cent growth to a year-over-year decline of 2.2 per cent
That would mark the first quarter of negative growth since the earnings "recession" that ended in 2016
The partial federal government shutdown in January and an expected drop in trading revenues provided additional impetus for analysts to cut
first-quarter bank earnings estimates
In a KBW note dated April 3, lead analyst Brian Kleinhanzl sees median year-on-year revenues from both equities and fixed income,
currencies and commodities (FICC) trading to have dropped by 15 per cent in the quarter
"Within financials, the industry that's been hit hardest is capital markets," said Tajinder Dhillon, senior research analyst at Refinitiv
"Those downward revisions have intensified over the last 90 days
Of the big 6 banks, Goldman Sachs, Morgan Stanley and JPMorgan have seen the biggest declines" in first-quarter earnings estimates.
But some
analysts believe the effects on banks of a more accommodative Fed and the flattened yield curve are overstated.
Oppenheimer lead analyst
Chris Kotowski wrote in a March 25 note "to be sure, rates and the yield curve have had an effect on bank earnings." But he called the
impact from the Fed's decision "a minor one," and wrote that aside from these impacts, "bank fundamentals are remarkably stable."
Recent
history shows that large US financial institutions have beat analyst estimates at a higher rate than the broader market
In the eight most recent quarters, the six banks have beat earnings estimates 83.3 per cent of the time on average, compared with the SP
500's 75.4 per cent average beat rate
Additionally, bank revenues surprised to the upside 79.2 per cent of the time, while SP 500 company revenues came in ahead of analyst
estimates 68.3 per cent of the time, per Refinitiv data.
In today's late-cycle reality, however, it is not clear that banks can beat even
Either way they should set the tone for what analysts predict will be a rocky earnings period
"Psychologically, these are bellwether companies that tend to drive sentiment," Dhillon added, suggesting that their quarterly reports are
proxy indicators of corporate earnings health
