CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

US Q4 bank earnings guide

Q4 earnings season from the big US banks will contain both good and bad points, while the chart shows a number of hurdles lie in the path of any sustained bounce.

Having seen a dramatic drop in bank shares over the past few months, the question is now whether the sector is good value. Upcoming earnings provide a chance to test that idea.

Volatility: after the quiet of 2017, much of 2018 was a rollercoaster ride.

Volatility is both good and bad for banks. Good, in that it boosts trading activity and revenue from spreads and commissions, but the higher risk can hurt performance. Jefferies reported results last Thursday, and this saw an 11% fall in trading revenues, and the average ‘value at risk’ level (which looks at how much money could be lost on any given day) rose 81% compared to results for a year earlier.

Funding costs: these might be on the up, as banks have to pay out more due to short-term interest rates going up. So far, interest margins have not been too hard hit, but this may begin to change. Smaller banks are already offering higher rates, so the big banks may have to follow suit.

Loan growth: this remains weak, despite the strength of the US economy. At Bank of America, total loan growth in the third quarter (Q3) was up just 1.4%. The US Federal Reserve (Fed) data suggests business loan growth at large banks has accelerated in the last few months of the year, but this has not been replicated in commercial real estate.

Dealmaking: Mergers and aquisations (M&A) picked up in 2018, after a difficult 2017, but the volume of new deals was weak in the final quarter (Q4).

Reserves: US banks have been running down reserves over the past few years, helping to improve earnings. But as the US economy starts to slow, banks may start to bolster their cash piles in order to provide a greater margin of safety.

Government shutdown: with 800,000 Federal employees currently going unpaid, the shutdown will start to have an effect on the broader economy, and bank earnings will be one area where this might show up, or if not in the actual earnings, then in the outlook. In addition, the initial public offering (IPO) activity grinds to a halt while the Security Exchange Commission (SEC) is on enforced leave, further hurting potential revenues.

XLF: financial sector ETF chart

Like the rest of the market, XLF shares have rallied hard since Christmas. But they are struggling to move much higher. 2457 is the first level to watch, and a breakout from here would challenge 2502 and then the 50-day simple moving average (SMA) at 2534.

If the rally has already priced in decent earnings then a fresh drop is possible, and a close back below 2400 would be the first sign of this. Longer-term, any rally faces hurdles at 2750 and then 2905, the December and September highs respectively.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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