Big banks kick off earnings season Friday, and many analysts expect robust results after a post-election stock-trading frenzy that may have provided stronger revenue.
Lined up for tomorrow are Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), and there's plenty of enthusiasm going into the results. The financial sector overall appears to have been a big benefactor of what traders are calling the "Trump rally," a market surge that began almost immediately after the November presidential elections. BAC shares have swelled some 35% since Nov. 8 to reach an eight-year high, while JPM shares are higher by nearly 29% after reaching record peaks. WFC is up by 20% after tapping an 18-month high.
Analysts expect these banks [as well as Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C), which are expected to report next week] to turn in robust results thanks to stronger trading revenues and higher yields on Treasury notes. They could also be bolstered by a handful of products like credit cards, and student and consumer loans. Trading revenue, particularly in fixed income, currency and commodities, had been a sore spot for banks up until about Q2. That started to stabilize last year and apparently was buttressed further with the post-election trading extravaganza.
But a note here about the seasonality of banking revenues: Though analysts expect Q4 to be relatively strong because of the unexpected end-of-year trading rush, the last quarter traditionally tends to be among the weakest for financials, analysts say. That's typically because many traders and institutional investors tend to wrap up their portfolios and books ahead of the holidays, when they take time off.
Beyond results, many market participants are expected to pay close attention to what bank executives say on their earnings calls about the economic outlook for 2017. A new presidential administration has promised deregulation and tax changes, and the Federal Reserve has said it might step up interest rates three more times this year after December's nudge. Investors may want to listen to what bank CEOS have to say about all these changes and what they mean not only for the sector but the economy as a whole.
BAC's Profit Forecast Jumps
BAC has undergone drastic cost cutting in recent quarters after it closed some 400 banks and stepped up investments in financial technology, including card-less ATMs and new mobile banking features. Analysts expect those moves to help lift profits, which they see jumping some 40%. At an industry conference in November, BAC Chief Financial Officer Tom Montag said the higher trading volumes are expected to juice double-digit growth in trading revenue.
Analysts reporting to Thomson Reuters forecast revenues that may come in 7% higher than a year ago at $20.96 billion, while earnings are projected at $0.38 a share.
Short-term options traders have priced in a potential share price move of 2.5% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim platform from TD Ameritrade.
Options action has been strong at the weekly 23-strike and 23.5-strike lines, while put activity is heaviest at the 22 and 22.5 strikes. The implied volatility sits in the lower half at the 16th percentile. (Please remember past performance is no guarantee of future results.)
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
Figure 1: NEW HIGHS. Like those of other banking stocks, BAC shares have enjoyed a healthy climb in the post-election rally and recently hit eight-year highs. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
JPM's Trading Business Gains
Analysts are also looking for JPM to turn in another solid quarter, especially after Chief Executive Jamie Dimon said at an industry conference in December that he expected his trading business to see a 15% quarterly gain from the year-ago period. He also noted then that JPM had picked up a "little bit" of market share in the interest-rates business after the exit of European banks, according to the media reports.
It's likely, too, that analysts may be listening for some insight on whether JPM will continue to buy back its shares, considering the stock has hit new-time highs. Dimon said in December that he wouldn't likely share that information until February or April.
At Thomson Reuters, analysts are projecting revenues to edge up to $23.95 billion and per-share profits to advance better than 8% to $1.43.
Short-term options traders have priced in a potential share price move just over 2% in either direction around the earnings release, according to the Market Maker Move™ indicator.
On the call side, volume is heaviest at the weekly 87 strike while put activity is busy at the 86 strike. The implied volatility also sits in the lower half at the 20th percentile.
Figure 2: FRESH ALL-TIME PEAKS. Since mid November, JPM shares have hit a number of record crests, and ahead of the earnings release are trading just off the all-time top. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Wells Fargo on the Comeback Trail
WFC appears to still be struggling to come back from last year's revelation that some employees opened upwards of 2.1 million fake accounts, leading to a $185 million fine tied to the scandal and the ouster of its chief executive. In November, WFC said it may face litigation costs that could reach an estimated $1.7 billion, and confirmed ongoing investigations from other regulatory agencies.
Last month, WFC reported that its new checking-account and credit-card openings have both dropped deeper than 40% in November from the same period a year before. This week the bank announced that it was restructuring employee compensation packages that focused on rewarding customer satisfaction and didn't include sales goals.
Thomson Reuters' analysts are expecting revenues to climb 4% to $22.47 billion while earnings could slip to $1.00 from last year's profit of $1.03.
Short-term options traders have priced in a potential share price move of just over 2% in either direction around the earnings release, according to the Market Maker Move™ indicator.
Call activity volume is at the weekly 55 strikes and at the 53.5 strike puts. The implied volatility is at the 41st percentile.
Figure 3: GAINING GROUND. WFC shares have had a rocky 12 months, but are still up 7% on a year-over-year basis. Since the election, WFC shares have touched 18-month highs while climbing slightly better than 20%. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Probability analysis results from the Market Maker Move indicator are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
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