Will Good Enough Bank Earnings Improve Tomorrow?
Estimize | Jan 18, 2017 12:10AM ET
One of the major themes expected to dominate earnings season this quarter was the resurgence of Wall Street. Financial stocks rallied following November’s presidential election over speculation that President Elect will repeal the most hampering parts of Dodd Frank. The Federal Reserve’s decision to raise rates shortly thereafter was just icing on the cake for a sector that struggled to regroup after the recession.
In hindsight, the strength of the recent rally was excessive given the mixed reports from the banks in the fourth quarter. JPMorgan (NYSE:JPM), as it usually does, lead the charge headlined by $1.58 on the bottom line and $24.33 billion on the top. But the next biggest report, Bank of America (NYSE:BAC), fell significantly short of analysts revenue estimates by over $600 million. It’s worth noting that Wells Fargo (NYSE:WFC) missed earnings and revenue estimates in its first full quarter since putting an end to shady sales practices.
Tomorrow’s reports from Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) cap off an otherwise lackluster bank season.
Goldman Sachs' post election rally which now looks overdone sets up for a large sell off if results fall short of target estimates. Analysts at Estimize expect Goldman to record $4.89 per share, reflecting a 2% decline from a year earlier. That estimate increased by about 13% in the past 3 months. Revenue for the period is forecasted to increase by 3% to $7.58 billion, marking two consecutive quarters of positive growth.
Being an investment bank, the volatility created after the election bodes well for Goldman Sachs trading business. Equity sales should see the biggest upside from the volatile environment while general market improvements advances fixed income and currency revenue. Meanwhile M&A activity and debt underwriting made a significant jump in 2016 that will support top line expansion.
The stars seem aligned for the banking giant’s upcoming report but any sign of weakness will undoubtedly push shares lower. Goldman’s vast exposure to international markets makes it prone to currency headwinds and macroeconomic uncertainty, especially in Europe.
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Citigroup could suffer a similar fate, but because it didn’t make nearly the same gains as Goldman Sach’s the selloff wouldn’t be as severe. The Estimize consensus peg earnings at $1.15 per share, about 6% higher than the same period last year. That estimate increased by 3% in the past 3 months, largely on post election and rate hike optimism. Revenue for the period is expected to increase by 8% to $17.20 billion, marking a full year of negative comps.
Trading revenue will again be an area of focus in the upcoming report. During the third quarter revenue from fixed income, currencies and commodities rose 35% while equity trading fell by 34% to $788 million. Overall trading revenue grew 16% to 4.1 billion on improving market conditions. Citi found additional support from rebounding oil prices and a 5% decline in loan loss reserve. A bulk of this quarter’s result will be predicated on the performance of these businesses.
Like most of its peers, the combination of weak FX translation and economic uncertainty poses a legitimate threat to performance.
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