US banks - Q2 earnings preview

The overall outlook for US banks still seems sunny.

The passage of tax cuts, further economic growth, reductions in regulation and higher interest rates all promise further improvement in earnings for the sector.

Several key elements should continue to make themselves felt:

1. Ongoing interest rate increases – Jerome Powell has stayed on the course of interest rate rises begun by Janet Yellen. Hints that press conferences may be included at each meeting would allow the Federal Reserve (Fed) more leeway on when to raise rates, moving away from the current structure, when only four meetings a year have press conferences and are therefore regarded as ‘live’

2. Declining regulatory spending – Donald Trump’s administration has already begun rolling back regulation, and more reduction in regulations will allow banks to cut spending on compliance and legal issues

3. Increased automation – banks continue to spend more on technology and improve automation of systems, while also reducing the number of branches. This should help boost margins over time

4. Higher loan growth – US firms continue to invest in growth, requiring more loans. Tax reforms reduce uncertainty regarding the treatment of capital expenditure, meaning banks should see further demand for loans

The SPDR Financial Sector ETF (XLF) provides a good overview of the health of the big US banks. The price has fallen steadily since the post-2007 high. The post-February 2016 uptrend remains to be tested, but the price is currently testing the 2646 area. Further support is possible at 2586 and then 2529, with the latter also close to trendline support.

A rally will head towards the 2825 high from June, and then 2850, the May high. A close above 2775 breaks the downtrend line from the March high, and then around 2810 the downtrend line from the January high comes into play.