Can major US banks post solid earnings and restore credibility? – Stock Market News
April 11, 2023 2:27 pm
As usual, the largest US investment banks will unofficially kickstart the first quarter earnings parade, with JP Morgan Chase, Citigroup and Wells Fargo unveiling their financial results on Friday, April 14, before Wall Street’s opening bell. Bank earnings have always been regarded as a proxy for the health of the broader economy, but now their role is magnified following the implosions of three US regional banks in March. Are financial institutions shielded against another systemic episode?
Tumultuous quarter but contagion fears subside
This year started with the best possible omens for banks as they were expected to continue to capitalise on higher net interest margins, which are essentially the difference between the interest income generated by long-term assets such as loans and the interest expense paid to short-term liabilities such as deposits. Moreover, the economy had not shown any signs of an aggressive slowdown or a severe recession, keeping provisions for non-performing loans (NPLs) at a relatively low level.
However, this euphoria got disrupted by the sudden collapse of Silicon Valley Bank, which was followed by the failures of Signature Bank and Silvergate Bank, while the First Republic Bank and Credit Suisse were rescued at the last minute to avoid further contagion. Interestingly, these systemic cracks did not occur due to insufficient risk management or exposure to junk assets like in 2008, but they were driven by mass deposit withdrawals as banks failed to pass on higher interest rates to depositors.
For that reason, investors tilted towards higher-yielding assets like money market funds, depriving banks of both their cheapest source of funding and their buffer against an adverse incident. As a result of all the above, bank stocks got hammered in the first quarter and have not yet shown any signs of recovery, even though uncertainty seems to be going away.
Key metrics
Investors seem to be looking for concrete evidence of financial resiliency to restore their trust in the banking system and the earnings season could deliver some. Firstly, market participants will focus on whether deposit outflows have severely affected some banks’ solvency to assess the probability of future collapses. In addition, banks’ balance sheets will provide useful insights on where all these deposits have been flowing to because they could be potentially fuelling another asset bubble.
Meanwhile, the level of loan provisions will be of particular interest as it will reflect the banks’ outlook on how deep they expect any upcoming recession to be. Financial institutions will continue to see their fundamentals getting squeezed due to pilling reserves and tighter credit conditions imposed to withstand another systemic shock. After those mass withdrawals and the precautionary reserve build-up, the big question that lies ahead is whether banks can retain the capacity to generate new loans and keep benefitting from wide net interest margins.
Apart from their traditional role, which includes their business in loans and deposits, the largest US banks heavily rely on investment banking activities such as IPOs and listings to generate revenue. This segment is expected to have suffered a tragic quarter after the collapse of SVB dealt a devastating blow to the already largely affected dealmaking business.
Valuations reflect heightened probabilities of another episode
The latest turmoil in the banking sector applied downside pressures on bank share prices as fears of a domino emerged. This sell-off compressed even further their already low valuations, suggesting that despite the continuous support of both the US government and regulators, investors still see some risks surrounding the financial industry. This is more than evident in the examined banks’ forward 12-month price-to-earnings (P/E) ratios, which are significantly lower than that of the S&P 500.
Overall, someone could argue that bank shares are currently in a ‘buy the dip’ zone, especially if they deliver better than expected results. Nevertheless, investors should not forget that the banking sector is substantially interconnected, thus an unexpected blow-up would not be easily contained.
JP Morgan to emerge unharmed
JP Morgan could be one of the gainers amid this crisis as it is considered one of the most reliable systemic banks, which is likely to have attracted a lot of deposits from the endangered smaller US regional banks during those turbulent times.
The banking giant is anticipated to record revenue of $36.23 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year increase of 14.70%. Additionally, Earnings per share (EPS) are estimated to increase by 23.88% on an annual basis to $3.42.
Citigroup under pressure amid major restructuring
Citigroup will face a tough earnings season, exhibiting major underperformance compared to the other two examined banks. The main reason behind this weakness is that compared to the other two, Citigroup relies more on its investment banking segment and less on its commercial one, while it is also in the middle of a costly restructuring.
The major investment bank is set to post an annual revenue increase of 4.00% from $19.30 billion to $20.10. However, its EPS is projected at $1.68, a 27.30% decrease relative to the same quarter last year.
Wells Fargo exhibits diverging signs
For Wells Fargo the picture remains blurry as on the one hand it is set to post a solid financial performance, but its domestic focus has dragged its stock price lower following the fate of its US regional peers.
The leading financial institution is on track for a 14.33% annual increase in its revenue figure, which could reach $20.11 billion. Meanwhile, EPS is also expected to jump from $0.61 last quarter to $1.14, also marking a 29.00% increase in annual terms.
Taking a technical look, Wells Fargo’s stock plummeted to a fresh two-year low on the back of the recent turmoil in the US banking sector. Meanwhile, the completion of a death cross between the 200- and the 50-day simple moving averages (SMAs) is inducing more downside pressure.
If earnings surprise positively, the price could test the September 2022 support of $39.40, which could act as resistance in the future. On the flipside, disappointing earnings could send the price to test the June 2022 low of $36.55.
As usual, the largest US investment banks will unofficially kickstart the first quarter earnings parade, with JP Morgan Chase, Citigroup and Wells Fargo unveiling their financial results on Friday, April 14, before Wall Street’s opening bell. Bank earnings have always been regarded as a proxy for the health of the broader economy, but now their role is magnified following the implosions of three US regional banks in March. Are financial institutions shielded against another systemic episode?
Tumultuous quarter but contagion fears subside
This year started with the best possible omens for banks as they were expected to continue to capitalise on higher net interest margins, which are essentially the difference between the interest income generated by long-term assets such as loans and the interest expense paid to short-term liabilities such as deposits. Moreover, the economy had not shown any signs of an aggressive slowdown or a severe recession, keeping provisions for non-performing loans (NPLs) at a relatively low level.
However, this euphoria got disrupted by the sudden collapse of Silicon Valley Bank, which was followed by the failures of Signature Bank and Silvergate Bank, while the First Republic Bank and Credit Suisse were rescued at the last minute to avoid further contagion. Interestingly, these systemic cracks did not occur due to insufficient risk management or exposure to junk assets like in 2008, but they were driven by mass deposit withdrawals as banks failed to pass on higher interest rates to depositors.
For that reason, investors tilted towards higher-yielding assets like money market funds, depriving banks of both their cheapest source of funding and their buffer against an adverse incident. As a result of all the above, bank stocks got hammered in the first quarter and have not yet shown any signs of recovery, even though uncertainty seems to be going away.
Key metrics
Investors seem to be looking for concrete evidence of financial resiliency to restore their trust in the banking system and the earnings season could deliver some. Firstly, market participants will focus on whether deposit outflows have severely affected some banks’ solvency to assess the probability of future collapses. In addition, banks’ balance sheets will provide useful insights on where all these deposits have been flowing to because they could be potentially fuelling another asset bubble.
Meanwhile, the level of loan provisions will be of particular interest as it will reflect the banks’ outlook on how deep they expect any upcoming recession to be. Financial institutions will continue to see their fundamentals getting squeezed due to pilling reserves and tighter credit conditions imposed to withstand another systemic shock. After those mass withdrawals and the precautionary reserve build-up, the big question that lies ahead is whether banks can retain the capacity to generate new loans and keep benefitting from wide net interest margins.
Apart from their traditional role, which includes their business in loans and deposits, the largest US banks heavily rely on investment banking activities such as IPOs and listings to generate revenue. This segment is expected to have suffered a tragic quarter after the collapse of SVB dealt a devastating blow to the already largely affected dealmaking business.
Valuations reflect heightened probabilities of another episode
The latest turmoil in the banking sector applied downside pressures on bank share prices as fears of a domino emerged. This sell-off compressed even further their already low valuations, suggesting that despite the continuous support of both the US government and regulators, investors still see some risks surrounding the financial industry. This is more than evident in the examined banks’ forward 12-month price-to-earnings (P/E) ratios, which are significantly lower than that of the S&P 500.
Overall, someone could argue that bank shares are currently in a ‘buy the dip’ zone, especially if they deliver better than expected results. Nevertheless, investors should not forget that the banking sector is substantially interconnected, thus an unexpected blow-up would not be easily contained.
JP Morgan to emerge unharmed
JP Morgan could be one of the gainers amid this crisis as it is considered one of the most reliable systemic banks, which is likely to have attracted a lot of deposits from the endangered smaller US regional banks during those turbulent times.
The banking giant is anticipated to record revenue of $36.23 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year increase of 14.70%. Additionally, Earnings per share (EPS) are estimated to increase by 23.88% on an annual basis to $3.42.
Citigroup under pressure amid major restructuring
Citigroup will face a tough earnings season, exhibiting major underperformance compared to the other two examined banks. The main reason behind this weakness is that compared to the other two, Citigroup relies more on its investment banking segment and less on its commercial one, while it is also in the middle of a costly restructuring.
The major investment bank is set to post an annual revenue increase of 4.00% from $19.30 billion to $20.10. However, its EPS is projected at $1.68, a 27.30% decrease relative to the same quarter last year.
Wells Fargo exhibits diverging signs
For Wells Fargo the picture remains blurry as on the one hand it is set to post a solid financial performance, but its domestic focus has dragged its stock price lower following the fate of its US regional peers.
The leading financial institution is on track for a 14.33% annual increase in its revenue figure, which could reach $20.11 billion. Meanwhile, EPS is also expected to jump from $0.61 last quarter to $1.14, also marking a 29.00% increase in annual terms.
Taking a technical look, Wells Fargo’s stock plummeted to a fresh two-year low on the back of the recent turmoil in the US banking sector. Meanwhile, the completion of a death cross between the 200- and the 50-day simple moving averages (SMAs) is inducing more downside pressure.
If earnings surprise positively, the price could test the September 2022 support of $39.40, which could act as resistance in the future. On the flipside, disappointing earnings could send the price to test the June 2022 low of $36.55.
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