Why is the Market Unimpressed with Bank Earnings?

The market appears to be painting JPMorgan (JPM) with the same brush as Wells Fargo (WFC) and Citigroup (C) after their quarterly releases, but the fact is that JPMorgan’s report represented all around strength and offers useful read-throughs for what to expect from pure-play investment banks, trust banks and regional operators in the coming days.  

It isn’t hard to appreciate the market’s negative reaction to the Wells and Citi reports, but the post-release weakness in JPMorgan shares is likely nothing more than a sell-the-news type of mindset. There is likely a comparability ground for the market’s lack of appreciation for these results as well. Two new accounting rules took effect this quarter, one dealing with revenue recognition on the asset management side and the other dealing with the valuation of ‘hard-to-price’ securities on the balance sheets. The earnings releases specify the impact of these rule changes, but they add to the ‘noise’ around these results.

Wells Fargo didn’t seem to benefit much from higher interest rates as rival JPMorgan did, likely indicating that the beleaguered bank had the wrong type of interest rate hedges in place. The bank is in the process of concluding a regulatory settlement that will require a restatement of today’s results in the coming days, but management wasn’t able to shed any more light on that issue beyond indicating that more details should be available in the 10Q. As such, it’s hard to read too much into Wells’ Q1 report as it will undergo a restatement in the coming days

We recently made a contrarian call on Wells by adding it to the Zacks Focus List, our core thesis being that worst was already priced in the stock and the market will slowly be coming around to appreciating this fact. The internals of the Wells report indicate that the estimate revisions trend for the current and coming quarters will likely be negative, in contrast to what can reasonably be expected for JPMorgan and Citi, which will keep the stock under pressure. This means that our Focus List call on Wells may have been premature, with the stock’s underperformance relative to its peers likely to persist a lot longer than we envisaged.

The chart below shows the year-to-date performance comparison Citi, JPMorgan, Wells and the S&P 500 index.

Wells’ net interest margin, the difference between what it pays depositors and what it charges borrowers, was flat from the preceding quarter and down from the year-earlier level. Growth in the bank’s loan portfolio and expenses also compare unfavorably with its peers. Wells’ loan portfolio was down from the year-earlier level while the same at Citi and JPMorgan were up +7% and 8%, respectively.

Citi’s results failed to impress as well, with the bank’s trading business, particularly the fixed income desk, failed to fully capitalize on the all-around volatility in Q1. Unlike JPMorgan’s +8% revenue growth in the fixed income, currencies and commodities or FICC business, Citi’s FICC revenue was down -7% in Q1.

Finance Sector Scorecard (as of Friday, April 13th)

We now have Q1 results from 5 of the 98 Finance sector companies in the S&P 500 index. Keep in mind however that these 5 companies account for 23.7% of the sector’s total market capitalization in the index.

Total earnings for these 5 Finance companies are up +20.4% from the same period last year on +6.9% higher revenue growth, with 100% beating EPS estimates and 60% beating revenue estimates. The comparison charts below put the results thus far in a historical context.

As you can see in the chart above, the sector’s growth picture is materially tracking above what we have been seeing in recent years, reflecting the combined effect of tax cuts, higher interest rates and more ‘normal’ capital markets activity. The right-hand side chart shows that earnings surprises are very numerous, but keep in mind that we are talking about 5 earnings reports at this stage.

For the quarter as a whole, total Finance sector earnings are expected to be up +22.7% from the same period last year on +4.7% higher revenues. This would follow +0.6% earnings growth in 2017 Q4 on +4% higher revenues.

The sector’s earnings growth momentum is expected to continue in the coming quarters as well, as the chart below shows.

Please note that the sector’s strong growth in Q1 and beyond isn’t a function of easy comparisons, but actual growth. You can see this in the dollar value of total sector earnings in the chart below.

The table below shows the sector’s Q1 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding four periods.

Please note that the Major Banks industry, of which JPMorgan, Bank of America and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

Driving this improved earnings picture for the banks and other finance companies is the combination of lower taxes and higher interest rates.

Expectations for 2018 Q1 As a Whole

The strong momentum we saw in the preceding earnings season is expected to continue this reporting cycle as well, with total earnings for the S&P 500 index expected to be up +16.6% from the same period last year on +7.5% higher revenues. This would follow the +13.4% earnings growth on +8.6% revenue growth in the 2017 Q4 earnings season, the best quarterly performance in more than 6 years.

There were two aspects of the preceding earning season that really stood out and put that reporting cycle in a category of its own; we will be looking to what extent these two aspect s get repeated this earnings season. These two standout features of the 2017 Q4 earnings season were the very strong momentum on the revenue front and impressive turnaround on the estimate revisions front.

The revenue momentum likely reflected a combination of the synchronized global growth environment and a favorable foreign exchange backdrop. With both of those factors still very much in play in Q1 as well, we can reasonably expect to see the revenue momentum trend continue this earnings season as well.

The story about trends in 2018 Q1 estimate revisions is better told by the chart below.

What this chart shows is that earnings growth expectations for 2018 Q1 moved up significantly since mid-December 2017. This represented a major trend shift relative to what we have been seeing over the last many years when estimates would actually be moving in the opposite direction. To be fair, the revisions trend had stabilized in the preceding quarters as well, with estimates for 2017 Q4 essentially remaining unchanged in the three months ahead of the start of that reporting cycle.

A big driver of these positive revisions is obviously the direct impact of the tax cuts, but that isn’t the only reason, as you can see in the revisions trend for revenues in the chart below.

We will be keeping a close eye on how estimates for 2018 Q2 evolve as companies report Q1 results and share their outlook for Q2 and beyond. Estimates for Q2 went up as well, as they did for the following quarters, when the same was happening to 2018 Q1 estimates. As of today, total Q2 earnings for the S&P 500 index are expected to be up +17.7% from the same period the year before on +7.2% higher revenues.

The chart below shows 2018 Q1 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to accelerate in Q2 and continue in the following quarters.

As you can imagine, expectations for full-year 2018 are for an impressive showing, with total earnings for the S&P 500 index expected to be +17.8% from the year-earlier level on +5.2% higher revenues. If achieved, this will be the highest annual growth pace for the index since 2010.

The table below shows the summary picture for 2018 Q1, contrasted with what was actually achieved in the preceding period.

Standout Sectors

As you can see, the Energy sector remains a big growth contributor in Q1, with total earnings for the sector expected to be up +59.4% from the year-earlier period on +16.1% higher revenues. But growth for the quarter would still be in double-digits even on an ex-Energy basis (last row in the table above).

What is driving the strong Q1 growth isn’t the Energy sector, but rather the breadth of growth across all sectors, with double-digit earnings growth for 11 out of the 16 Zacks sectors, including Technology and Finance.

For the Technology sector, total Q1 earnings are expected to be up +20.7% on +11.4% higher revenues, which would follow the sector’s impressive +24.2% earnings growth on +11.1% higher revenue growth.

The Finance sector, which sat out the preceding quarter with an essentially flat showing, total Q1 earnings are expected to be up +22.7% from the same period last year on +4.7% higher revenues.

Driving the Finance sector’s strong growth in Q1 and beyond is the combined effect of tax cuts, higher interest rates and an improved domestic growth environment. Finance sector’s earnings were only up +1.2% in full-year 2017 and in low single digits in the three years prior to that, but are on expected to be up an impressive +25.1% in full-year 2018.

The Technology sector, on the other hand, has already been on stronger ground, with full-year 2017 earnings for the sector up +15.8% and expected to be up +17.3% in 2018. The enterprise spending environment was expected to improve this year even before the tax cuts, with the tax windfall expected to give a much needed boost to those trends. On top of these we have the existing secular trends in cloud computing, artificial intelligence and big data that are expected to remain growth areas in the space.

Please note that Technology and Finance aren’t just any two sectors out of the 16 in the S&P 500 index; these two sectors combined are the twin pillars of index’s total profitability, bringing in more than 40% of the index’s total earnings this year. The Energy sector’s outlook has improved, but the sector simply lacks the heft of these two. The Energy sector is expected to bring in about 5% of the index’s total earnings this year.

Reporting Calendar

As you can see in the chart above, the reporting cycle is ramping up with more than 150 companies reporting results, including 56 S&P 500 members. While the bulk of this week’s reports are dominated by the Finance sector, we have a number of leading players from other sectors reporting results already. The major non-financial reports on deck to report results this week include Netflix (NFLX) on Monday, IBM (IBM) on Tuesday, and Schlumberger (SLB) and GE (GE) on Friday.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 153 companies including 56 S&P 500 and reporting this week.

Company	Ticker	Current Qtr	Year-Ago Qtr	Last EPS Surprise %	Report Day	Time
M&T BANK CORP	MTB	2.74	2.15	10.83%	Monday	BTO
BANK OF AMER CP	BAC	0.59	0.41	6.82%	Monday	BTO
NETFLIX INC	NFLX	0.63	0.4	0.00%	Monday	AMC
CELANESE CP-A	CE	2.33	1.81	6.45%	Monday	AMC
WINTRUST FINL	WTFC	1.29	1	2.63%	Monday	AMC
PINNACLE FIN PT	PNFP	1.09	0.83	0.00%	Monday	AMC
FIRST DEFIANCE	FDEF	0.98	0.81	5.62%	Monday	AMC
DESTINY MEDIA	DSNY	N/A	0	N/A	Monday	AMC
LAKELAND INDS	LAKE	0.19	0.13	21.05%	Monday	AMC
SERVISFIRST BCS	SFBS	0.58	0.42	-6.25%	Monday	AMC
Charles Schwab	SCHW	0.54	0.39	-0.36%	Monday	N/A
UNITEDHEALTH GP	UNH	2.92	2.37	3.60%	Tuesday	BTO
JOHNSON & JOHNS	JNJ	2.01	1.83	1.16%	Tuesday	BTO
COMERICA INC	CMA	1.56	1.02	2.40%	Tuesday	BTO
PROLOGIS INC	PLD	0.74	0.63	1.52%	Tuesday	BTO
NORTHERN TRUST	NTRS	1.42	1.09	3.85%	Tuesday	BTO
PROGRESSIVE COR	PGR	1.19	0.67	2.60%	Tuesday	BTO
GOLDMAN SACHS	GS	5.67	5.15	15.92%	Tuesday	BTO
OMNICOM GRP	OMC	1.05	0.97	0.65%	Tuesday	BTO
MELLANOX TECH	MLNX	0.52	0	37.14%	Tuesday	BTO
MERCANTILE BANK	MBWM	0.56	0.46	-4.00%	Tuesday	BTO
LAM RESEARCH	LRCX	4.36	2.8	17.62%	Tuesday	AMC
CSX CORP	CSX	0.66	0.51	14.29%	Tuesday	AMC
INTL BUS MACH	IBM	2.39	2.38	0.19%	Tuesday	AMC
UNITED CONT HLD	UAL	0.25	0.4	4.48%	Tuesday	AMC
INTUITIVE SURG	ISRG	1.65	1.56	6.15%	Tuesday	AMC
HANCOCK HLDG CO	HBHC	0.9	0.63	3.61%	Tuesday	AMC
FULTON FINL	FULT	0.29	0.25	0.00%	Tuesday	AMC
HOPE BANCORP	HOPE	0.38	0.28	3.23%	Tuesday	AMC
LEGACY TX FINL	LTXB	0.72	0.37	-3.23%	Tuesday	AMC
BADGER METER	BMI	0.39	0.3	8.70%	Tuesday	AMC
ADTRAN INC	ADTN	-0.19	0.15	225.00%	Tuesday	AMC
INTERACTIVE BRK	IBKR	0.56	0.34	10.26%	Tuesday	AMC
UNITED FIN BCP	UBNK	0.28	0.27	-17.24%	Tuesday	AMC
UTD COMM FIN CP	UCFC	0.17	0.1	6.67%	Tuesday	AMC
WESBANCO INC	WSBC	0.7	0.6	8.20%	Tuesday	AMC
CONSOL TOMOKA	CTO	1.25	2.27	-27.66%	Tuesday	AMC
ABBOTT LABS	ABT	0.58	0.48	1.37%	Wednesday	BTO
US BANCORP	USB	0.94	0.82	1.15%	Wednesday	BTO
TEXTRON INC	TXT	0.49	0.46	-3.90%	Wednesday	BTO
MORGAN STANLEY	MS	1.28	1	9.09%	Wednesday	BTO
QCR HLDGS INC	QCRH	0.71	0.68	6.06%	Wednesday	BTO
ASML HOLDING NV	ASML	1.38	1.12	41.60%	Wednesday	BTO
FREDS INC	FRED	N/A	-0.11	-180.00%	Wednesday	BTO
MGIC INVSTMT CP	MTG	0.36	0.31	59.26%	Wednesday	BTO
SL GREEN REALTY	SLG	1.64	1.57	0.00%	Wednesday	AMC
UTD RENTALS INC	URI	2.43	1.64	0.00%	Wednesday	AMC
AMER EXPRESS CO	AXP	1.73	1.34	2.60%	Wednesday	AMC
TORCHMARK CORP	TMK	1.46	1.15	0.81%	Wednesday	AMC
CROWN CASTLE	CCI	1.26	1.24	23.76%	Wednesday	AMC
STEEL DYNAMICS	STLD	0.91	0.82	10.20%	Wednesday	AMC
CROWN HLDGS INC	CCK	0.8	0.72	0.00%	Wednesday	AMC
CVB FINL	CVBF	0.31	0.26	3.70%	Wednesday	AMC
BOSTON PRIV FIN	BPFH	0.22	0.15	-4.35%	Wednesday	AMC
CATHAY GENL BCP	CATY	0.79	0.61	-3.17%	Wednesday	AMC
GREAT SOUTH BCP	GSBC	0.87	0.81	8.54%	Wednesday	AMC
UNIVL FST PRODS	UFPI	0.42	0.34	14.69%	Wednesday	AMC
CDN PAC RLWY	CP	2.16	1.9	-1.17%	Wednesday	AMC
TEXAS CAP BCSHS	TCBI	1.37	0.8	2.59%	Wednesday	AMC
SLEEP NUMBER CP	SNBR	0.56	0.56	65.00%	Wednesday	AMC
UMPQUA HLDGS CP	UMPQ	0.28	0.21	6.90%	Wednesday	AMC
ALCOA CORP	AA	0.64	0.63	-15.45%	Wednesday	AMC
PTC INC	PTC	0.16	0.12	17.65%	Wednesday	AMC
PIER 1 IMPORTS	PIR	0.19	0.34	-25.00%	Wednesday	AMC
VALMONT INDS	VMI	1.8	1.68	-0.60%	Wednesday	AMC
TRIUMPH BANCORP	TBK	0.56	0.02	17.39%	Wednesday	AMC
EAGLE BCP INC	EGBN	1.03	0.77	-1.12%	Wednesday	AMC
FIRST CT BANCRP	FBNK	0.41	0.32	-2.86%	Wednesday	AMC
BANCORPSOUTH BK	BXS	0.5	0.39	2.44%	Wednesday	AMC
COHEN&STRS INC	CNS	0.61	0.47	0.00%	Wednesday	AMC
RLI CORP	RLI	0.5	0.44	6.25%	Wednesday	AMC
TRISTATE CP HLD	TSC	0.34	0.26	3.03%	Wednesday	AMC
NUCOR CORP	NUE	1.1	1.11	18.18%	Thursday	BTO
GRAINGER W W	GWW	3.37	2.88	34.86%	Thursday	BTO
PENTAIR PLC	PNR	0.83	0.65	-1.06%	Thursday	BTO
DANAHER CORP	DHR	0.94	0.85	2.59%	Thursday	BTO
PEOPLES UTD FIN	PBCT	0.3	0.22	14.81%	Thursday	BTO
SNAP-ON INC	SNA	2.74	2.39	1.13%	Thursday	BTO
BB&T CORP	BBT	0.92	0.74	5.00%	Thursday	BTO
KEYCORP NEW	KEY	0.38	0.32	0.00%	Thursday	BTO
QUEST DIAGNOSTC	DGX	1.53	1.33	0.73%	Thursday	BTO
BANK OF NY MELL	BK	0.97	0.8	0.00%	Thursday	BTO
GENUINE PARTS	GPC	1.32	1.08	0.90%	Thursday	BTO
PPG INDS INC	PPG	1.41	1.35	0.85%	Thursday	BTO
PHILIP MORRIS	PM	0.87	0.98	-3.68%	Thursday	BTO
ALLIANCE DATA	ADS	4.21	3.64	29.24%	Thursday	BTO
COMP TASK	CTG	0.06	0.05	0.00%	Thursday	BTO
TAIWAN SEMI-ADR	TSM	0.6	0.54	1.59%	Thursday	BTO
EAST WEST BC	EWBC	1	0.88	-5.43%	Thursday	BTO
WABCO HOLDINGS	WBC	1.83	1.47	11.11%	Thursday	BTO
WEBSTER FINL CP	WBS	0.79	0.62	-2.99%	Thursday	BTO
SYNTEL INC	SYNT	0.44	0.46	58.97%	Thursday	BTO
SONOCO PRODUCTS	SON	0.72	0.59	-1.37%	Thursday	BTO
BLACKSTONE GRP	BX	0.76	0.82	1.43%	Thursday	BTO
GATX CORP	GATX	1.17	1.44	-5.56%	Thursday	BTO
CHART INDUSTRIE	GTLS	0.19	0.01	43.75%	Thursday	BTO
HOME BANCSHARES	HOMB	0.41	0.33	2.94%	Thursday	BTO
S&T BANCORP INC	STBA	0.7	0.52	3.17%	Thursday	BTO
SANDY SPRING	SASR	0.75	0.63	1.59%	Thursday	BTO
NOVARTIS AG-ADR	NVS	1.33	1.13	3.45%	Thursday	BTO
MEDIDATA SOLUTN	MDSO	0.18	0.2	50.00%	Thursday	BTO
TILE SHOP HLDGS	TTS	0.08	0.16	-200.00%	Thursday	BTO
ABB LTD-ADR	ABB	0.31	0.28	32.00%	Thursday	BTO
LAWSON PRODUCTS	LAWS	0.16	0.09	-112.50%	Thursday	BTO
E TRADE FINL CP	ETFC	0.78	0.48	3.23%	Thursday	AMC
LIMELIGHT NETWK	LLNW	-0.01	-0.01	100.00%	Thursday	AMC
EASTGROUP PPTYS	EGP	1.1	0.99	3.64%	Thursday	AMC
IBERIABANK CORP	IBKC	1.42	1.02	5.56%	Thursday	AMC
MARTEN TRANS	MRTN	0.19	0.15	0.00%	Thursday	AMC
EQUITY BANCSHRS	EQBK	N/A	0.45	-4.08%	Thursday	AMC
ASSOC BANC CORP	ASB	0.41	0.35	7.89%	Thursday	AMC
WERNER ENTRPRS	WERN	0.37	0.22	7.69%	Thursday	AMC
ATLASSIAN CP-A	TEAM	-0.03	-0.05	-133.33%	Thursday	AMC
WESTERN ALLIANC	WAL	0.93	0.7	3.66%	Thursday	AMC
GLACIER BANCORP	GBCI	0.53	0.41	-4.35%	Thursday	AMC
FIRST FIN BC-OH	FFBC	0.46	0.39	9.76%	Thursday	AMC
PREFERRED BANK	PFBC	1.07	0.71	8.89%	Thursday	AMC
EXPONENT INC	EXPO	0.62	0.39	14.63%	Thursday	AMC
ROGERS COMM CLB	RCI	0.62	0.46	1.47%	Thursday	AMC
CHEMED CORP	CHE	2.37	1.82	10.94%	Thursday	AMC
CHEROKEE INC	CHKE	0.07	0.15	-171.43%	Thursday	AMC
DAVIDSTEA INC	DTEA	0.23	0.29	6.67%	Thursday	AMC
INDEP BK MASS	INDB	1.03	0.78	1.14%	Thursday	AMC
SB FINANCIAL GP	SBFG	0.31	0.31	N/A	Thursday	AMC
BRANDYWINE RT	BDN	0.32	0.32	-3.03%	Thursday	AMC
CLEARWATER PAPR	CLW	0.62	0.7	8.75%	Thursday	AMC
PZENA INVESTMNT	PZN	0.19	0.12	11.76%	Thursday	AMC
ROPER TECHNOLGS	ROP	2.49	2.11	3.45%	Friday	BTO
REGIONS FINL CP	RF	0.31	0.23	3.85%	Friday	BTO
SCHLUMBERGER LT	SLB	0.38	0.25	9.09%	Friday	BTO
SUNTRUST BKS	STI	1.11	0.87	3.81%	Friday	BTO
SYNCHRONY FIN	SYF	0.75	0.61	11.11%	Friday	BTO
CITIZENS FIN GP	CFG	0.76	0.61	5.97%	Friday	BTO
STATE ST CORP	STT	1.58	1.21	7.02%	Friday	BTO
HONEYWELL INTL	HON	1.89	1.66	0.54%	Friday	BTO
KANSAS CITY SOU	KSU	1.37	1.17	1.47%	Friday	BTO
WASTE MGMT-NEW	WM	0.82	0.66	2.41%	Friday	BTO
BAKER HUGHES GE	BHGE	0.07	-0.04	7.14%	Friday	BTO
PROCTER & GAMBL	PG	0.99	0.96	3.48%	Friday	BTO
STANLEY B&D INC	SWK	1.35	1.29	1.87%	Friday	BTO
GENL ELECTRIC	GE	0.11	0.21	-3.57%	Friday	BTO
TRANSUNION	TRU	0.46	0.38	0.00%	Friday	BTO
STEVEN MADDEN	SHOO	0.5	0.47	2.13%	Friday	BTO
CLEVELAND-CLIFF	CLF	-0.19	-0.11	73.33%	Friday	BTO
GENTEX CORP	GNTX	0.4	0.33	3.13%	Friday	BTO
MANPOWER INC WI	MAN	1.65	1.09	3.41%	Friday	BTO
MOBILE MINI INC	MINI	0.34	0.25	13.89%	Friday	BTO
AMERIS BANCORP	ABCB	0.78	0.6	0.00%	Friday	BTO
ERICSSON LM ADR	ERIC	-0.03	-0.27	-450.00%	Friday	BTO
OFG BANCORP	OFG	0.27	0.26	311.11%	Friday	BTO
BANCO LATINOAME	BLX	0.58	0.6	-5.45%	Friday	BTO
CONTROLADORA VL	VLRS	-0.15	-0.71	27.27%	Friday	BTO
FIRSTENERGY CP	FE	0.7	0.77	2.90%	Friday	AMC

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