April 5, 2019 / 3:59 PM / 4 months ago

Wall St Week Ahead-Big banks to report Q1 results with lowered expectations

    By Stephen Culp
    NEW YORK, April 5 (Reuters) - Investors will focus on
falling profits, a more dovish Federal Reserve and lower
interest rates as major U.S. banks kick off what analysts expect
to be the first quarter of contracting corporate earnings since
    On Friday, April 12, JPMorgan Chase & Co and Wells
Fargo & Co will post results to begin the earnings
season in earnest. Citigroup Inc and Goldman Sachs Group
Inc will report the following Monday, followed by Bank of
America Corp and Morgan Stanley on Tuesday.
    In the wake of the Federal Reserve's cautious shift due to
signs of softness in the U.S. economy and the subsequent drop in
10-year Treasury yields, S&P 500 banks are seen posting
year-on-year first-quarter earnings growth of 2.3%, down from
8.2% forecast six months ago, according to Refinitiv data.
    (For an interactive graphic on evolving bank earnings
estimates: tmsnrt.rs/2HOVt1D)
    "The Fed pivoted so abruptly, which gives one pause about
what they're saying about the economy," said Chuck Carlson, 
chief executive officer at Horizon Investment Services in
Hammond, Indiana. "Flat to falling interest rates are not good
news for bank interest margins. It's not surprising that
analysts are taking down earnings estimates."
    The central bank's change in tack put the brakes on what had
been a pattern of quarterly rate hikes, amid signs of slowing
economic growth.
    Slowdown jitters have also hit 10-year Treasury yields. The
benchmark bond's yield hit a 15-month low in the first quarter
, flattening the yield curve and narrowing the gap
between the interest banks pay depositors and the interest they
charge consumers, which is bad news for profits.
    "That's why the estimates are going down," Carlson added.
"(Analysts are) fearful of interest margins for banks and
there's an underlying concern about loan growth."
    In the first three months of the year, the S&P 500
bounced back from a sell-off in December, gaining 13.1%, its
biggest quarterly increase since 2009. But financials
underperformed the wider market, gaining 7.9% in the quarter as
the new low-interest-rate normal that boosted other sectors was
a headwind for banks.
    Since October, analysts have drastically lowered their
expectations for S&P 500 earnings in 2019, with first-quarter
estimates dropping from 8.1% growth to a year-over-year decline
of 2.2%. That would mark the first quarter of negative growth
since the earnings "recession" that ended in 2016. 
    The partial federal government shutdown in January and an
expected drop in trading revenues provided additional impetus
for analysts to cut first-quarter bank earnings estimates. 
    In a KBW note dated April 3, lead analyst Brian Kleinhanzl
sees median year-on-year revenues from both equities and fixed
income, currencies and commodities (FICC) trading to have
dropped by 15% in the quarter.  
    "Within financials, the industry that's been hit hardest is
capital markets," said Tajinder Dhillon, senior research analyst
at Refinitiv on London. "Those downward revisions have
intensified over the last 90 days. Of the big 6 banks, Goldman
Sachs, Morgan Stanley and JPMorgan have seen the biggest
declines" in first-quarter earnings estimates.
    But some analysts believe the effects on banks of a more
accommodative Fed and the flattened yield curve are overstated.
    Oppenheimer lead analyst Chris Kotowski wrote in a March 25
note "to be sure, rates and the yield curve have had an effect
on bank earnings." But he called the impact from the Fed's
decision "a minor one," and wrote that aside from these impacts,
"bank fundamentals are remarkably stable."
    Recent history shows that large U.S. financial institutions
have beat analyst estimates at a higher rate than the broader
market. In the eight most recent quarters, the six banks have
beat earnings estimates 83.3% of the time on average, compared
with the S&P 500's 75.4% average beat rate. Additionally, bank
revenues surprised to the upside 79.2% of the time, while S&P
500 company revenues came in ahead of analyst estimates 68.3% of
the time, per Refinitiv data.
    In today's late-cycle reality, however, it is not clear that
banks can beat even lowered expectations. Either way they should
set the tone for what analysts predict will be a rocky earnings
    "Psychologically, these are bellwether companies that tend
to drive sentiment," Dhillon added, suggesting that their
quarterly reports are proxy indicators of corporate earnings
health. "Banks are up there." 

 (Reporting by Stephen Culp; Editing by Alden Bentley and Dan
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