All trading involves risk. Losses can exceed deposits.
Over 40 years’ heritage
Over 185,000 clients worldwide
Over 15,000 markets

Mixed fare expected from US bank earnings

Slowing loan growth and a flatter yield curve could make this a difficult season for US bank earnings, although longer term the picture is still encouraging. 

All trading involves risk. Losses can exceed deposits.

It’s not likely to be the most exciting quarter for US bank earnings, and, given the rally in their stocks since November, the risks to the downside appear to be increasing. Loan growth seems to be slowing, a point picked by the Federal Reserve’s survey of loan data, which showed that outstanding loans fell across the industry for the first time in three years in February, with the first quarter as a whole showing a small decline.

Long-term rates have fallen even as short-term ones have risen thanks to the Fed’s gradual hiking policy. The ongoing drop in the US 10-year yield is a clear illustration of this. At the end of 2016 the yield was above 2.5%, its highest level since late 2014, and expectations were high that the upward move would continue. Now the yield is back to 2.3%, a clear sign that investors are moving back towards bonds, at least for the time being. A flatter yield curve does not help bank earnings, depressing margins and hitting profitability.

A Reuters poll of analysts suggested that net income would rise 4.7% year-on-year, but here comparisons are flattering as the first quarter of 2016 was a tough time, with activity in capital markets shrinking and loan growth almost coming to a full stop. Thus, only growth well ahead of expectations can avoid some disappointment seeping into the sector.

Indeed, expectations may well be the downfall of the sector’s earnings this time. At the beginning of the year, the stock market was riding high, and banks particularly so. The KBW Nasdaq bank index gained 32% from early November until 1 March. But, as the old saw has it, ‘the stock market is forward looking.’ And looking ahead, the picture is not encouraging. President Trump’s supposed campaign of legislative victory has not even got off the ground, the failure of the healthcare bill raises the prospect that less complex and less pressing measures, such as looser bank regulation, will be pushed further down the list.

Longer term, the sector’s fundamentals look better. The US economy is ticking along nicely, despite Friday’s disappointing jobs report, while higher short-term interest rates will help profitability. Interestingly, April sees the best monthly performance for US financial stocks, with an average 3% over the past 20 years. From April the sector enters a period that is flat to modestly negative, before beginning to rally from October onwards. Bank earnings on this occasion could mark a top for the time being, within the context of a much longer-term rally. 

This information has been prepared by IG, a trading name of IG Markets 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. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Education

  • Pricing and weighting

    Find out the purpose of major and minor stock indices and how they are compiled. Learn how to gain exposure to these volatile markets through some of the most popular trading products in the world.

  • Introduction to leverage

    Learn how you can use leverage to gain a large exposure to a financial market with a relatively small initial outlay. Leverage can magnify your profit, but we explain that it’s important to use it with care, because it also increases your risk of loss.

  • Trading CFDs

    In this section we offer an introduction to CFD (Contracts for Difference) trading and how it works, featuring examples and reasons to trade CFDs. We also discuss the related pricing and funding requirements.