US bank earnings in focus

In 2013 we saw US equities hit record highs with the financial sector very much in demand, but how will 2014 fare? 

The Federal Reserve’s aggressive bond-buying scheme drove up the demand for US government bonds last year which, in turn, pushed yields lower; most US banks reported a drop in bond-trading income on the back of this. This month will see a reduction in that scheme, which could encourage traders to lock in profits from last year and will be good news for US banks in terms of bond-trading revenue.

On the flipside, just as they're enjoying house price appreciation, homeowners face a pinch from higher rates. Mortgage rates, which follow 10-year Treasury-note rates, are probably set to rise this year. Given the fairly modest growth expected in 2014 the rise might not be that sharp, but it could still discourage new home buyers and those who are re-financing. This may impact bank revenues, particularly those with large mortgage businesses.

While there is still a degree of uncertainty as to when exactly a rate hike by the Federal Open Market Committee will take hold, the fact remains that investors already seem to be pricing in the removal of quantitative easing at this juncture. ‘Tapering is not tightening’ is becoming a constant refrain, but QE will have to end at some point, and should any increase in economic activity and growth lead to inflationary pressures then monetary tightening will not be that far behind.

Unemployment levels have fallen to 6.7%, and a fall in the unemployment rate to 6.5% has been seen as a trigger point for at least the consideration of tightening. With the current pace we could see our first rate hike in 2015 – a failure to do so may well delay tightening until after the 2016 elections.

As banks such as Goldman Sachs and Citigroup have seen share prices break above nine-month ranges over the past few trading sessions, the technical indicators, coupled with the promise of improved margins and maximised earnings, should provide us with a picture where we see increased upside in stock prices.

The first two months of 2014 will be crucial; US reporting season kicks off in January, and in February the US government will have to renegotiate the debt ceiling. IG now offer out of hours (OOH) trading on a number of US stocks, including the major US banks. US banks will be reporting fourth quarter earnings for 2013 in mid-January, when the following will be available for OOH trading: 

JPMorgan Chase – 14 January

JPMorgan Chase is trading at $58.99, after a 30% gain in share price over the past 12 months.

The bank reported third-quarter earnings per share (EPS) of $1.42, beating the low expectations analysts had. JPMorgan Chase has been hit by massive legal costs and fines for a series of misconduct cases in the last year; most of the damage was done in the run up to the credit crisis when the bank misled mortgage customers. The company has agreed to a $13 billion settlement with the US authorities, but – as with the mis-selling of payment protection insurance (PPI) by British banks – the situation could keep dragging on. If that is the case we could see a cap on the company’s share price.

The rise through the bearish trend-line resistance from the July 2013 highs and the confluence of the key moving averages put a bullish note to the bank’s share price potential. The descending triangle has broken to the top side – using textbook targeting we may see the $60.78 level tested.

Bank of America – 15 January

Bank of America is currently at $16.76; the stock has gained 38% over the past year.

The bank swung to profit in the third quarter, but this included cost-cutting and profit from the disposal of its shareholding in China Construction Bank. The financial institution’s position reflects the current markets conditions: revenues from equities are higher, offsetting the drop in earnings from bond trading, while small business lending is also higher. However, trimming of the employee numbers suggests the banks is still nervous. 

Again there is a strong trend from the July 2012 lows for this bank. Driving through the $16-per-share mark for the first time since June 2010 has bolstered its appeal, but remaining above this level is vital if we are to see additional gains. That said we may well see some profit-taking and rising support from the July lows.

Citigroup – 16 January

Citigroup is trading at $53.81, up 27% on the previous 12 months.

Last quarter Citigroup’s EPS and revenue both came in below estimates, even though the bank cut costs by 4%. Like its peers, Citi has suffered a fall in bond-trading revenue. Citi Holdings, which manages the bank’s toxic assets, reported a 29% drop in the number of bad loans compared with the last year. This is a sign the bank is exercising the demons of the credit crisis. 

The share price has pushed through the $53.20 resistance level which was established on 29 May of last year and remains in an uptrend from the July 2012 lows at $25. This has made for a break-out from the bounds of the ascending triangle which was formed by the rising trend-line support from 5 April lows of $42, and the horizontal resistance at $53.30.

Goldman Sachs – 16 January

Goldman Sachs is currently trading at $179.40, up 33% since last January.

In the third quarter of 2013 Goldman Sachs reported an EPS of $2.88 and revenue of $6.72 billion, while the market consensus was for an EPS of $2.45 and revenue of $7.2 billion. The chief financial officer Harvey Schwartz said he was ‘not happy’ with the results. Goldman Sachs may not have any outstanding legal cases or fines looming, but its bond trading revenue dropped by 44% compared with last year; this is the largest fall in bond income from a major US bank. 

Goldman Sachs is another stock that has broken out of its six-month consolidation range in breaking the $170 level – this should now provide a base for any downside with the rising support from the July 2012 lows also creating a barrier. The 200 daily moving average level $160 is the key if any breach of the overall trend takes place, while big resistance at the $180 round number seems to be causing a few problems. Any breach may trigger a raft of stops and long orders – this would bring the $185 level (representing highs from April 2010) into view.

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