Bank earnings this season will come with an extra dose of uncertainty, as the tax reforms of President Donald Trump prompt the big US institutions to announce special charges that will hit profits.
The big five banks are forecast to report a hit of about $31 billion to their earnings this time around, but in the longer term we should see these losses recouped. However, the sector will likely spend time explaining the impact of the changes, which may well skew core earnings, as banks write down the value of their deferred tax assets and pay one-off taxes on earnings from foreign sources.
In the longer term, we should expect lower taxes to boost earnings, with Bernstein analysts expecting a boost of 15% to performance on average in 2019.
Moving away from tax reform, banks are expected to report a drop in earnings of around 6%, even as revenues rise by over 5%. The third quarter (Q3) saw a 6.5% rise in earnings, which in itself was down on Q2’s 10%. Thus, we should look out for any improvement that suggests either that earnings were better than forecast, or even that the downward trend of the past two quarters has been reversed.
Banks have comfortably outperformed the S&P 500 since the election of Donald Trump, as can be seen in the graph below: