US bank earnings preview

We look at the impending arrival of bank earnings, which will have seen a number of factors driving continued growth in profits.

Bank of America
Source: Bloomberg

After a long period of quiet, activity has returned to trading floors, a move that will cheer bank management no end. Trade wars, data-hacking and higher commodity prices have sent shockwaves through the sector. The jump higher in the volatility index (VIX) is emblematic of this – it jumped by over 100% in February, the biggest rise on record. Watch the trading divisions for an improvement in revenue.

Higher interest rates will be good for banks as well. Jerome Powell dutifully continued Janet Yellen’s policy of rate increases at his first meeting as chairman of the Federal Reserve (Fed). In addition, a steeper path of rate increases is expected, due to an improved economic outlook. Higher-margin lending will aid profitability, as the spread between long-term assets and short-term liabilities widens.

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Loan growth remains strong as well. Consumer sentiment is picking up, hitting 101.4 in March from 99.7 a month earlier for the Michigan consumer sentiment index. Average hourly earnings are picking up to a degree, although perhaps not as much as the Fed would like.

Finally, we have tax reform. Given the higher tax rates faced by big banks, the major names in the sector should continue to do well, with a cut in corporate taxes driving a 20% rise in profits. Return on tangible common equity will receive a boost, improving the attractiveness of the sector.

Current expectations for earnings at the major banks are as follows:

  Reporting Date EPS (adjusted) forecast Year-on-year (YoY) growth
13/4/18 $2.28 45.2%
13/4/18 $1.61 19.6%
16/4/18 $0.59 41.9%
17/4/18 $5.56 38.4%
18/4/18 $1.26 24.4%

 

JPMorgan

Despite the volatility of quarter one (Q1), the stock reached a new record high in March, at $122.00. A pullback in March found support around $106.09, and since then the stock has recovered, although it remains below the 50-day simple moving average (SMA) at $113.27.

With the uptrend still intact, we look for a resumption of the march higher, with a drop below $103.00 needed to put a real dent in this rally.

Citigroup

The multi-year high of January has been followed by a decline that wiped out all the gains made since September 2017. Although, the stock price has defended the $66.36 level, around the lows of the summer, and since then further gains have been seen.

However, the price remains below the 200-day SMA ($72.15), which coincides with crucial support over the past two months. A move above here would bring $77.91 and then $80.69 into play.

Bank of America

Having fallen back from the recent high at $33.06, the stock has found strong support around $29.00, where it bottomed in February.

Further gains will target the 50-day SMA at $31.31, and then on to the March high at $33.06. Below $28.70, the rising trendline from the June 2016 lows comes into play around $28.00.

Goldman Sachs

Goldman stock has fought hard to hold the $243 level over the past two months and, having succeeded in this for the time being, it is now contemplating a move back above $262, which would open the way to $275.

The uptrend remains broadly intact, with the price having posted a new high in March, and it would take a move below $243 to suggest more near-term weakness is at hand.

Morgan Stanley

For the third time since September, Morgan Stanley stock has held the rising trendline from the June 2016 low, with the latest test finding strong support around $52.00 as well.

Further gains above the 50-day SMA ($55.23) would suggest a move back to $58.00 and then the March high at $59.37. A close below $52.00 would suggest a deeper retracement, towards the $50.00 level.

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