We get JPMorgan (JPM) and Wells Fargo (WFC) kicking off the financial results for the banking sector tomorrow, Friday, 10/12/12. We've given our earnings preview for both stocks earlier this week here on Seeking Alpha, and expect good results from both entities at least on an operating basis. (There is still some noise around JPM regarding the London Whale fiasco, but most of the earnings hit was taken in the June quarter, and thus the Q3 '12 numbers are expected to be cleaner for the capital markets bank.)
From watching the Thomson Reuters data, we think financial stocks will start to see better numbers and possibly even upward earnings revisions starting with Q3 '12 reports and into Q4 '12.
We have been tracking financial sector (as well as all S&P 500 sectors) earnings estimates on our blog since last May, and both financial estimates and their revisions are starting to tell a more positive story.
Here is the expected financial sector earnings growth data on Q3 '12 and Q4 '12, and how analyst estimates have tracked since July 1, 2012:
+4.9% +5.3% +4.2%
The first column is as of October 5th, the 2nd column is as of October 1st, and the 3rd column is as of July 1st, so as the reader can readily see, financial sector earnings estimates have been very steady since mid-summer. For the rest of the S&P 500, year-over-year growth is expected at -2.4% for the index as a whole for Q3 '12, so we could make the case that with attractive valuations in financials (low P/Es, good dividends) and better-than-benchmark relative growth, the group should start getting some traction.
For Q4 '12:
+29.1%, +28.9%, +26.6%
The 4th quarter for financials looks even better, but we do not know how much of that is capital markets, mortgages, credit quality improvement or net interest margin (NIM) gains. My guess is financials have more than a few tailwinds right now with QE3, strong debt issuance in Q3 '12 and mortgage rates at all-time lows, so some combination of all of the above is aiding the sector.
The one missing ingredient for the sector is revenue growth: basically since the March '09 market low and off the mortgage crisis-driven Great Recession, the sector has only been able to drive y/y revenue growth of 1% - 2% quarter-to-quarter. We noted in our Wells Fargo preview that y/y revenue growth for Wells is expected to be 9% in Q3 '12, which is very healthy relative to the rest of the banks and financials. (JPM's revenue growth is expected to be up just 1% in Q3 '12.)
For a better insight into financial sector earnings for the last 6 quarters, and then Q3 '12 and Q4 '12, here is the progression of year-over-year earnings growth (as of October 5th):
Q4 '12 +29.1%
Q3 '12 +4.9%
Q2 '12 +63% (not a clean number, operating is about 5% I believe)
Q1 '12 +13.6%
Q4 '11 +4.9%
Q3 '11 +12.7%
Q2 '11 -28.7% (this sharp drop was a BAC write off, and why Q2 '12 was so large, given the compare)
What could be a big issue is what happens with Dodd-Frank post November 6th, and how the Congress and the White House aligns.
We believe, that with QE3, the financial sector can put up low double-digit earnings growth, especially if the anti-business, anti-wealth, climate can be diminished in Washington.
Our largest financial position is JPM, but we are also long WFC, Goldman (GS), Schwab (SCHW), CME and Visa (V). Although GE is considered an industrial, frankly GE Capital's improvement is helping the stock, so we consider that a 50% financial.
Financials are 13% - 14% of the S&P 500, and we are overweight that benchmark weighting. The sector is attractive on a valuation basis, with faster-than-S&P 500 earnings growth expected, along with better dividend yields.