Wednesday, October 14, 2015

Why US Banks soon will be singing the Blues

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Analysts Apprehensive – Quarterly Profits Reports


Estimates seem to be moving in the wrong direction with Wall Street banks about to report on how much money they have been making. The industry had jointly reported $43 billion in profits, coming off a quarter and analysts are expecting a rising rate environment with increased demand which would tend to keep things moving for $15.1 trillion sector.

But with declining expectations for a rate hike in 2015 together with other factors, it tends to make the analysts apprehensive with regards to how the quarterly profit reports would turn out. For the Big Four coming up, JPMorgan Chase would get things started with the others following during the week, like Bank of America, Wells Fargo, Citigroup, Goldman Sachs and PNC. S&P 500 financials, as a sector is expected to indicate a 3.8% annual growth in profits as per S&P Capital IQ.

This seems to be an improvement than the 5.1% decline predicted for the total index and is a big disillusionment from early forecasts. The revenue is said to grow by 4.4%. As per July, analysts had been predicting 9.9% growth which a year back the expectations seemed to be a showy 27%.

Bank Earning – Increase – Based on Performance of Bank Stocks


Hence the results showed better than expected and are likely to remain below the earlier high hopes for financials which were expected to be the best performing sector of 2015. Bank earnings are increasing based on the performance of bank stocks recently and one would think that the earning could be a disappointment. However, it is not the same for all bank stocks.

Two great concerns for bank earnings are the weak trading and low interest rates. Trading profits being low seems to be correct. Trades in government bonds and the equity trading could be alright in the quarter though activity in the range of other financial areas could have been weak to awful.

In the case of awful, one could point to agency, asset backed bond as well as commodity trading. With regards to the weak side, one could view at corporates, currencies and municipals.

Substantial Revision – Individual Companies


Substantial revision has been seen in individual companies recently. According to FactSet, analysts have reduced MetLife estimates from 88% a share to 77 cents, while Goldman Sachs from $3.46 to $3.20, Morgan Stanley from 68 cents to 63 cents. In the S&P 500’s financial sector, expectations on earnings have been condensed for 53 of the 88 companies.

The weakness tends to come since loan growth has been steady due to strong climate in the commercial real estate. According to Federal Reserve data, in the third quarter, the sector increased by 9.7%, the greatest of the year after rising 6.7% in 2014.

Moreover, investment banking has been fairly strong all through the year and though the global revenue has been down by 10% year after year, it has been in level at $28 billion in the U.S. This was due to a record of $9.7 billion haul by way of mergers and acquisition revenue, as per Dealogic.

Banks stocks seem to have failed in 2015 with KBW NASDAQ Bank Index off 4.8% a year to date as against a 2.2% less in the S&P 500. In October, the index was up by 1.3% trailing behind the broader market’s gain of almost 5%.

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