Gallery: America’s Best And Worst Banks 2018
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Everybody loves a good comeback story, as golf fans might tell you following Tiger Woods’ unexpected victory at the Masters over the weekend. The markets have also staged quite a comeback since the end of 2018, and there was more evidence of that Friday when the S&P 500 Index closed above 2900 for the first time since last fall.
The S&P 500 is now up more than 23% from its Dec. 24 low as earnings season begins, and JP Morgan got things off pretty nicely on Friday. Now it’s time for more big banks to report, and the first one Monday, from Goldman Sachs, looks like it might be a bit of a puzzle.
As detective Sherlock Holmes once said, “Well, Watson, what do you make of it?” Investors might be asking themselves the same question this morning after a first glance at Goldman Sachs’ earnings as another huge week of quarterly big bank reporting begins.
Goldman Sachs took care of business on the earnings side of the equation in Q1, easily surpassing third-party consensus estimates with a $5.71 earnings per share reading. The average analyst projection was $4.96.
However, revenue of $8.81 billion came in under third-party consensus of $9.07. The lower than expected top line appeared to reflect weaker trading activity in the quarter, something many analysts had predicted going into bank earnings due in part to low volatility in the markets and investor shyness after stocks cratered in December.
Fixed income trading revenue fell 11% to $1.84 billion, and stock-trading revenue tumbled 24% to $1.77 billion. There’s no way to get around it. These just aren’t very good numbers, though they weren’t surprising considering they came in near analyst estimates. The question is whether investors might discount some of the bad news in Q1 as a short-term obstacle that might be a one and done issue as the year rolls on.
With Goldman Sachs, you don’t like to see them miss on revenue, but management of expenses was so good it might have helped them manage the overall 18% trading revenue drop. The issue now is how do they continue to make things balance. Will trading revenue be able to come back enough? You can’t just cut and cut and cut. Goldman Sachs shares rolled back and forth between a bit higher and a bit lower in pre-market trading right after the report.
The other big bank this morning is Citigroup, which also posted better than expected earnings per share at $1.87 vs. third-party consensus of $1.80. Revenue of $18.6 billion came in just a little under analysts’ expectations. Fixed income trading came in above where Wall Street had been looking, but equities trading slumped. Remember, some of the banks might have gotten a lift earlier in Q1 from the Fed’s December interest rate hike, something that became apparent Friday with earnings from JPMorgan Chase.
Citigroup also appeared to do a good job managing expenses, and if you were bullish about the banks Friday it doesn’t look like Monday’s results would be likely to change things too much. The market doesn’t seem to have too much direction early on as many investors continue struggling to interpret the two big reports this morning.
The puzzle so far with bank earnings, despite Friday’s JP Morgan-assisted rally, is that you could make arguments either way about the quality so far. Wells Fargo, for instance, beat earnings expectations but saw shares get hit Friday due in part to disappointing guidance about the bank’s net interest income outlook. Citigroup and Goldman Sachs didn’t really have the flags waving in one direction or the other.
After a rough start, the old week ended on a very strong note with the S&P 500 Index finishing above 2900 for the first time in six months. The all-time high close is around 2930, so we’re getting pretty near.
The Dow Jones Industrial Average had an even better day than the S&P on Friday, due in part to the performance of two of its components: Walt Disney and JP Morgan. The strength in JP Morgan was likely a function of earnings, as the company kicked off earnings season by topping the Street’s expectations on both top- and bottom-lines. Also, it’s possible that positive comments about the economy from JP Morgan Chairman and CEO Jamie Dimon might have added to the general good feelings across sectors Friday.
Disney was arguably one of the “happiest places” to be on Wall Street Friday as the stock catapulted to better than 11% gains after the company announced a streaming service offering lower prices than Netflix. Perhaps proving Newton’s Third Law of Motion that every action has an equal and opposite reaction, shares of Netflix fell nearly 4.5% (see more on Disney and Netflix below). Friday’s double-digit gains brought DIS to a new all-time high, and it’s not often that one sees a Dow stock rise more than 11% in a single session.
It was one of those days that showed how the Dow can get easily influenced by just a couple of names, rising 1% while the S&P rose just a shade more than 0.6%. Still, both indices ended higher for the week. The S&P 500 is up three weeks in a row going into the new week, and crude oil prices registered their sixth-straight week of gains. Volatility, meanwhile, continued to descend, as the Cboe Volatility Index ended the week just above 12. That’s down from 17 just a few weeks ago and well below the historical average of around 15.
As the Cboe Volatility Index dug a deeper hole, Treasury yields climbed. The slide below 2.4% in the 10-year yield earlier this year and the yield curve inversion seem like faraway memories now, with the 10-year yield back above 2.55%. That’s still below where they were at the start of 2019, but the push above what some analysts saw as key resistance at 2.55% might help set a more positive tone for the week ahead. Falling yields earlier this year had caused some hand-wringing about a possible recession. Now we’re starting to see U.S. economic growth estimates turn higher.
Speaking of higher, some analysts are now looking at the two bank earnings Friday—JPM and Wells Fargo—and wondering if current Q1 S&P 500 earnings estimates might be a bit too negative. One thing to consider is that it’s still very early to be talking about this. Another week or two of earnings from across multiple industries might help clarify whether the average analyst estimate for a low-to-mid single-digit year-over-year earnings decline is still in the cards.
However, one thing we might have learned Friday was that it’s easy to live in the moment and overlook something that happened a while back. JP Morgan’s quarter, in particular, appeared to benefit from the Fed’s late December rate hike, and that’s something many people didn’t really factor in. The biggest surprise in JP Morgan was trading revenue not being as bad as many had thought, but in a way JP Morgan had a big first-mover advantage. Now the onus might be on Goldman Sachs and Morgan Stanley to show that they, too, had good trading quarters.
From a sector standpoint, the week ended with cyclical stocks ahead of the game. Industrials, Financials, and Communication Services were some of the biggest gainers, while Health Care and Staples stayed in the rear. This is often the kind of market action one sees when investors feel positive about the economy. This week brings some more economic news, including China’s Q1 economic growth, U.S. March retail sales, U.S. March housing starts and building permits, and U.S. March industrial production (see more below). We’ll also have the Fed’s Beige Book for April, which is a summary of business activity across Federal Reserve member banks.
Also remember that this is a shortened week, with U.S. markets closed Friday for the Good Friday holiday. That could potentially cause some heightened volatility Thursday ahead of the long weekend.
Don’t Forget Big Blue: Amid the slew of bank earnings early this week, it might be easy to forget it’s not all about the Financial sector early in earnings season. For instance, most investors are probably aware that FAANG member Netflix is due to report tomorrow, but so are Johnson & Johnson and CSX, along with United Continental and IBM. Between these four, investors might get a really good sense of trends in health care, consumer goods, air travel, transport, and to some extent, Info Tech.
Of all these earnings reports, IBM might be among the most interesting. The company delivered strong Q4 earnings and issued robust guidance the last time it reported, back in January. Revenue, however, declined year-over-year. Consider watching results from IBM’s Technology Services and Cloud Platforms segment, which posted nearly $9 billion in Q4 revenue but just missed analysts’ expectations. It might also be worth checking in to see if IBM has any updates on its acquisition of software firm Red Hat.
Soft Industrial Production Mulled Ahead of Data: Tomorrow brings the latest monthly industrial production data from the Fed, and it follows three consecutive months of weak performance for this key metric. Last time out, in February, industrial production rose just 0.1%, and it fell in January. Softness in durable goods manufacturing was the story earlier this year, and that could reflect falling demand from both businesses and consumers for some of the bigger ticket items like machinery and major appliances. Manufacturing output fell 0.4% in February, while utilities output was the report’s only real strong point.
One question heading into the March report tomorrow is whether the Fed’s decision to keep interest rates low might have increased demand from where it was in January and February, when the Fed had just raised rates for the fourth time in a year. Another question might be whether higher commodity costs are playing a role in current softness. Crude has been on a tear most of the year, and some of the industrial metals like copper have been climbing again, too.
Greenspan Delivers Note of Caution: Former Fed Chairman Alan Greenspan made some bearish comments on CNBC early Friday, saying growing U.S. deficits and the rising cost of entitlements pose dangers in the future. He’s also worried about inflation. His remarks didn’t seem to hurt markets too much Friday, but they could help serve as a reminder that the markets are reaching historic highs now and prudence is never a bad idea. With the S&P only about 1% away from its all-time high close, it might not be the best time for investors to go “all-in.” Also, with the old quarter done, now could be a good time to consider looking at your performance and seeing if Q1’s big stock market rally has your portfolio more weighted to stocks than you originally intended. Greenspan long ago warned about the danger of “irrational exuberance,” and while the markets and economy do appear healthy, his words still have meaning for investors who might be getting carried away by this fierce rally.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Citigroup Inc. is scheduled to report earnings before Monday’s open. Citigroup’s stock hit a split-adjusted record high of $570/share in 2006 and is currently trading near $67/share. The stock can easily gap up if the numbers are strong or gap down if the numbers disappoint. To help you prepare, here is what the Street is expecting:
Citigroup is expected to earn $1.78/share on $18.71 billion in revenue. Meanwhile, the so-called Whisper number is $1.84. The Whisper number is the Street’s unofficial view on earnings.
Company Profile & Various Businesses:
Here is a brief company profile courtesy of Thomson Reuters Eikon:
Citigroup Inc. (Citi), incorporated on March 8, 1988, is a financial services holding company. The Company’s whose businesses provide consumers, corporations, governments and institutions with a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management. The Company operates through two segments: Citicorp and Citi Holdings. Citicorp is the Company’s global bank for consumers and businesses and represents its core franchises. Citicorp is focused on providing products and services to customers and leveraging the Company’s global network, including various economies. As of December 31, 2016, Citicorp was present in 97 countries and jurisdictions, and offered services in over 160 countries and jurisdictions. Citicorp consists of the operating businesses, including Global Consumer Banking (consists of consumer banking businesses in North America, Latin America (consisting of Citi’s consumer banking businesses in Mexico) and Asia), and Institutional Clients Group (which includes Banking and Markets and securities services).
Citigroup competes with just about ever big financial institution on the planet including but not limited to: JPMorgan Chase, Goldman Sachs, Morgan Stanley, and UBS, just to name a few.
Pay Attention To How The Stock Reacts To The News:
From where I sit, the most important trait I look for during earnings season is how the market and a specific company reacts to the news. Remember, always keep your losses small and never argue with the tape.
Lower trading volume. Falling mortgage rates. An inverted Treasury yield curve. A slowing U.S. and global economy. The odds seem pretty stacked against big banks on multiple fronts as earnings season starts tomorrow.
Making things even more challenging, many U.S. big banks enter Q1 reporting time facing tough comparisons to a year ago and with less support from the 2017 U.S. tax reform legislation that gave many firms a boost early last year.
The first results of all this turbulence land at Wall Street’s front door on Friday morning when JP Morgan Chase (JPM) and Wells Fargo (WFC) report Q1 earnings before the opening bell. Citigroup (C) steps to the plate Monday morning. Other big banks also report next week.
JP Morgan, Wells Fargo, and Citigroup are all expected to report slight drops in revenue from a year ago, according to third-party consensus estimates (see more below). Earnings per share are also expected to be down a touch for JP Morgan in Q1, analysts said. Bank stocks trail the S&P 500 (SPX) in performance so far this year (see chart below).
A common investor misconception is to think of the big U.S. banks as one entity responding to the same cues. While sometimes the bank stocks move in sync on news developments, it’s also important to distinguish them, because they’re not a solid bloc. For instance, falling mortgage levels probably mean more for Wells Fargo than the other banks reporting Friday and Monday, because WFC has a huge retail mortgage business.
Meanwhile, the global stock trading environment—which might be a bit weak this year due in part to falling volatility—could pose a bigger risk to JP Morgan Chase with its huge trading business. If the economy is weakening, that could hurt Citigroup with its credit card exposure.
The investment banking businesses at JPM and WFC will probably get a close look from investors amid market talk that trading has been subdued in the Q1 vs. a year ago, when volatility was elevated. The first quarter this year featured a government shutdown, followed by a Fed pivot that pretty much killed volatility, Briefing.com noted. That might have worked against banks from a trading standpoint. Recent stock market volume has been pretty thin.
Also, Briefing.com said, the market closed last year in a tailspin, which might have sent some traders and investors to the sidelines. With the Securities & Exchange Commission (SEC) closed for part of Q1 due to the government shutdown, that might have hurt the underwriting business for banks, though initial public offerings (IPOs) did start to pick up by the end of Q1.
At the same time, the China tariff battle, Brexit, and the inversion of the yield curve in late March all might have caused uncertainty in the business world, perhaps limiting the market for banks’ services. How all this plays out in earnings will soon become clear.
Meanwhile, mortgage rates have fallen significantly from recent highs near 5%, with average 30-year mortgages at around 4.3%, according to BankRate.com. While it’s possible that lower rates might be giving the moribund housing market a little new life in quarters to come—which could potentially help lenders—the lower rates might also eat into some of the big banks’ profit margins. Just a year ago, rates were on the rise and there was a lot of hope for an improved mortgage business. It might be interesting to hear what WFC executives have to say on this topic.
Speaking of WFC executives, the company recently announced the retirement of CEO Tim Sloan. There’s a lot of debate right now in the financial world about who WFC should consider as a replacement, especially since the bank said it wants to hire an outsider. Sometimes that can cause uncertainty, because historically the big banks have tended to elevate insiders to the top position. Perhaps we can get more clarity about the situation on WFC’s earnings call tomorrow.
The other thing that investors might want to stay tuned for, especially on Friday, is what bank CEOs have to say about the economy in general. JP Morgan’s Jamie Dimon is one financial leader whose comments often get a close read on earnings day, so we’ll wait and hear if he has anything to say about how he sees fundamentals shaping up in coming months.
JPMorgan Chase Earnings and Options Activity
When JPMorgan Chase releases results, it is expected to report adjusted EPS of $2.35, vs. $2.37 in the prior-year quarter, on revenue of $28.47 billion, according to third-party consensus analyst estimates. Revenue is expected to fall 0.2% year-over-year.
Options traders have priced in about a 2% (about $2) stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform from TD Ameritrade. Implied volatility was at the 22nd percentile as of this morning. Weekly call options have been active at the 105, 108 and 109 strikes, and put activity has been concentrated at the 97 and 103 strikes.
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.
Wells Fargo Earnings and Options Activity
Wells Fargo is expected to report adjusted EPS of $1.10, vs. $0.96 in the prior-year quarter, on revenue of $20.99 billion, according to third-party consensus analyst estimates. Revenue is expected to be down 4.3% year-over-year.
Options traders have priced in a 2.5% ($1.23) stock move in either direction around the coming earnings release, according to the Market Maker Move indicator on the thinkorswim platform. Implied volatility was at the 28th percentile as of this morning.
Weekly put activity has been higher in the 46-strike puts, while call activity has been active at the 49 and 50-strike calls.
Citigroup Earnings and Options Activity
Citigroup is expected to report adjusted EPS of $1.80, vs. $1.68 in the prior-year quarter, on revenue of $18.65 billion, according to third-party consensus analyst estimates. Revenue is expected to be down 1.2% year-over-year.
Options traders have priced in a close to 3% ($1.95) stock move in either direction around the coming earnings release, according to the Market Maker Move indicator on the thinkorswim platform. Implied volatility was at the 30th percentile as of this morning.
Call activity for C has been higher in the 65, 67.5 and 70 areas, while put focus has been active from the 65 through 62.5 strikes.
TD Ameritrade® commentary for educational purposes only. Member SIPC.