Fed Cut Clouds Banks' Earnings Outlook, Are Lenders Worried?
Zacks Investment Research | Aug 01, 2019 08:50AM ET
On Jul 31, Federal Reserve Chairman Jerome Powell announced the widely anticipated quarter-point rate cut. The central bank said that the reduction was necessary to counter a sluggish global economy and under-par inflation. However, Powell described the rate cut as a “midcycle adjustment” and does not foresee any economic weakness that would require a full-fledged rate-cutting cycle.
But for banks, rate cut clouds the future earnings outlook. Lower rates will weigh on margins, reducing the possibility of future profits. In fact, big banks like JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc. (NYSE:GS) have already reduced their projections for the upcoming quarters till 2020.
Factors That Boosted Earnings in Q2
U.S. banks’ second-quarter earnings were boosted mainly by American consumers who preferred “using credit cards more than debit.” High spending power and low interest rates led them to utilize credit facilities for purchasing all durables and non-durables.
The second quarter was profitable for all major banks of Wall Street. JPMorgan topped the list with a 3.6% EPS beat. Citigroup, Wells Fargo Corp. (NYSE:C) and Bank of America Corp. (NYSE:BAC) surpassed their respective estimates owing to a credit surge and higher consumer banking revenues.
Goldman Sachs was the only exception as net revenues declined by 2% year over year to $9.5 billion in the second quarter.
As of Jul 31, 74.5% of companies in the Finance sector has reported earnings, of which banks are majority participants. The estimated Q2 earnings growth from the sector is 5.9% on 7.2% revenues growth. As of Jul 31, earnings have increased by 4.5% and revenues by 3.8%. Though Q2 revenues are expected to fall from Q1, earnings growth should be substantially higher. In Q1, earnings growth came at 2.7% on 8% revenue growth.
Retail banking fueled earnings during the second quarter more as stronger borrowing boosted revenues and profits. JPMorgan reported that card spending has increased 11% to $192.5 billion. Whereas Wells Fargo reported a 6% increase.
Additionally, the average rate for 30-year, fixed-rate mortgage has fallen below 4%, improving demand for purchase and refinancing homes driven by mortgage originations for JPMorgan, Wells Fargo and Citigroup Inc. (NYSE:C) .
A standalone event, which improved profits for JPMorgan, Citigroup, Wells Fargo and Goldman Sachs, was the IPO of the electronic trading platform Tradeweb Markets Inc. (NASDAQ:TW) .
Majorbanks including Citi, JPMorgan, Wells Fargo, Bank of America and Goldman Sachs have gained 36.7%, 18.8%, 51.%, 24.5% and 31.7%, respectively, on a year-to-date basis. Each of these stocks has a Zacks Rank #3 (Hold). Original post
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