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The second-quarter 2018 earnings season is already knocking at the doors with big names — JPMorgan JPM, Wells Fargo WFC, Citigroup C and PNC Financial PNC — all reporting financial numbers tomorrow, before the opening bell.
After an impressive first-quarter performance driven by significant volatility, major banks lost momentum on the flattening of the yield curve. Therefore, net interest margin (the backbone for banks’ top-line growth) is expected to have remained subdued in the second quarter.
Further, volatility-driven growth in trading revenues, which supported the top line during the January-March quarter, is likely to be muted in the second quarter. Though uncertainty mainly related to the U.S.-China trade war and some other geo-political tensions induced volatility, client activity returned to normalized levels. Therefore, not much support is expected from this source of revenues, primarily for big banks.
In addition to benefits from rising interest rates, a moderate improvement in lending will likely energize interest income for banks. Per the Federal Reserve’s latest data, loans are predicted to improve slightly in the to-be-reported quarter. Particularly, weakness in revolving home equity loans might have offset growth in commercial and industrial (C&I), and consumer loans, to some extent.
Mortgage business is anticipated to have continued to witness a slowdown in the April-June quarter. With interest rates moving higher, refinancing activities have been slowing down. Therefore, no major help is expected from this source.
Further, investment banking performance is anticipated to have been flat. Strong equity issuances globally might have been boosted by IPOs and follow-on offerings. So, equity underwriting fees are projected to have escalated. Also, a potential rise in fees from increasing M&As in certain sectors will likely have helped banks garner advisory fees. These are, however, expected to have been more than offset by lower debt origination fees, as rising rates will have limited corporates’ involvement in these activities.
Additionally, credit quality is likely to have remained strong, backed by an improving economy and conservative underwriting standards.
On the cost front, while the absence of considerable legal expenses since the last few quarters is encouraging, increased investments in technology to improve digital offerings might have escalated costs moderately.
In addition, passage of the new law to lessen banks’ regulatory burden and lower tax rates will have supported bottom-line growth.
Per our latest Earnings Preview, overall earnings for the major banks in second-quarter 2018 are projected to rise 8.5% year over year.
Let’s take a look at the four major banks scheduled to announce results tomorrow.
JPMorgan will report the second-quarter earnings before the opening bell. With a Zacks Rank #3 (Hold) and Earnings ESP of +0.06%, the chances of a likely earnings beat in the quarter to be reported are bright. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Client activity returned to normalized levels in the to-be-reported quarter. So, this will likely have led to relatively stable trading revenues in the quarter. Nonetheless, similar to the prior quarters, equity trading revenues are expected to have supported total trading revenues in the second quarter. A modest improvement in lending — mainly in the areas of commercial and industrial, and consumer — will likely have led to an increase in net interest income (NII). A rise in interest rates will provide some support to the stock, despite flattening of the yield curve (Read more: Trading & Loan Growth to Drive JPMorgan's Q2 Earnings).
Notably, JPMorgan surpassed the Zacks Consensus Estimate in all the trailing four quarters, as shown in the chart below:
JPMorgan Chase & Co. Price and EPS Surprise
JPMorgan Chase & Co. Price and EPS Surprise | JPMorgan Chase & Co. Quote
On Friday, yet another big bank, Wells Fargo, is also slated to announce results. Wells Fargo is likely to have benefited from easing margin and high interest income, though marginally, in Q2. Particularly, weakness in revolving home equity loans might have offset growth in commercial and industrial (C&I), consumer and overall real estate loans to some extent. Nonetheless, mounting expenses resulting from legal costs and low mortgage business are expected to dent this banking giant’s results. (Read more: Will Legal Hassles Impact Wells Fargo's Q2 Earnings?).
Wells Fargo posted an average beat of 0.71% over the preceding four quarters, having beaten the Zacks Consensus Estimate in two of them, as demonstrated in the chart below:
Wells Fargo & Company Price and EPS Surprise
Wells Fargo & Company Price and EPS Surprise | Wells Fargo & Company Quote
For another big bank, Citigroup, we cannot conclusively predict earnings beat in the quarter, as higher credit costs are expected to have hurt its financials. Moreover, volatility-driven trading revenues are expected to have remained flat year over year in the second quarter. Nonetheless, the company is anticipated to witness improvement in consumer banking revenues, while pressure on margins is likely to somewhat ease. Notably, the equities business is expected to have remained strong in the quarter to be reported, whereas the fixed income business might have experienced a disappointing performance. (Read more: Will Flattish Trading Dampen Citigroup's Q2 Earnings?).
Further, this Zacks #3 Ranked stock surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as reflected in the chart below:
Citigroup Inc. Price and EPS Surprise
Citigroup Inc. Price and EPS Surprise | Citigroup Inc. Quote
Likewise, we cannot conclusively predict earnings beat for PNC Financial in the second quarter, with an Earnings ESP of -0.23% and a Zacks Rank #3. Given the improvement in the lending scenario, net interest income (NII) is expected to improve, while flattening of yield curve will likely somewhat hurt. Moreover, given the continued momentum in customer activity, in terms of using credit and debit cards, consumer services revenues are expected to have improved. Additionally, despite a slowdown in refinancing activities during the quarter under review, due to the persistent rise in rates, mortgage originations were decent. Thus, residential mortgage revenues are also expected to have witnessed a modest improvement.
However, though management expects non-interest expenses to be up in low-single digits on a sequential basis, the company’s continued efforts toward its cost-saving program are likely to keep overall expenses under control. (Read more: What's in Store for PNC Financial in Q2 Earnings?)
Having beaten estimates in each of the last four quarters, PNC Financial posted an average beat of 2.6%.
The PNC Financial Services Group, Inc Price and EPS Surprise
The PNC Financial Services Group, Inc Price and EPS Surprise | The PNC Financial Services Group, Inc Quote
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Check later our full write-up on earnings releases of these stocks.
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