Q2 Earnings Outlook: Financial Firms’ Reporting Season Off to Good Start

But with new rules hitting banks, corporate results could face headwinds in the second quarter of 2011

U.S. stocks improved early Thursday after JPMorgan Chase kicked off earnings season by reporting better-than-expected profits and some good news on jobs and retail sales were released.

JPMorgan said its net income rose more than 10%, as the bank reported second-quarter earnings of $1.27 per share on revenue of $26.8 billion–which topped the Street consensus forecast of $1.22 EPS on $25 billion in revenue.

On Friday, Citibank plans to release earnings before the markets open. The average estimate of analysts is for profits to move up about 8% from the year-ago quarter. Over the past three months, the average estimate has moved down from $1.01 to $0.97.

U.S. banks have been facing tougher capital requirements, other new rules and weaker trading in the second quarter, say analysts such as Richard X. Bove of Rochdale Securities LLC.

Banks, though, won’t sell shares to raise capital as their stock now trades below book value, Bove says, and thus have been shedding jobs. Bank of America, he says, is particularly undervalued.

Overall Outlook

In terms of overall corporate earnings and the markets, some analysts see a decidedly mixed picture. “In many ways, the second quarter of 2011 looks and feels similar to the same period last year,” explained Nathan Behan of Prima Capital Holding in a report on the second quarter.

However, Behan points out, global growth–especially in the developed nations–has hit a “soft patch” after a good first quarter. Plus, the global political economy has “drastically changed from a year ago,” with inflationary pressures coming to the fore.

“[C]ommodity prices are higher across the board year over year, though many cooled off during the second quarter,” he said. “Absent a reversal in this trend, it will fall to business and individual consumption to drive growth in the second half of the year, an uneasy prospect at best.”

The good news for many corporations is that they continue to have “exceptionally healthy balance sheets,” Behan argues, and this gives them cash to support inventory or business expansion.

As for investors, higher commodity prices have portfolio manager bullish on the sector, Prima Capital analysts shared during a webinar late Wednesday. They are also upbeat on MLPs, but more as plays on energy consumption and transit, not energy prices (which remain volatile). In addition, they note that money managers are cautious on REITs, which have done well year to date.

Earnings Calendar

While JPMorgan and Citi are reporting their second-quarter earnings this week, big-bank rivals such as Bank of America, Wells Fargo and BNY Mellon are set to share their recent performance news on July 19 before the markets open.

Charles Schwab releases its second-quarter results earlier in the week (on July 18). Later in the week, Raymond James Financial (July 20) and Morgan Stanley (July 21) will make their announcements on three-month results as of June 30.

Toward the end of the month, UBS (July 26), independent broker-dealer LPL Financial (July 27) and Ameriprise Financial (July 27) will give investors and the markets an update on their second-quarter performance. (Ameriprise’s embattled broker-dealer Securities America–now up for sale–is expected to receive big news on its class-action settlement on July 25.)  

Across the border, the Royal Bank of Canada, or RBC, won’t report until the end of August, since it’s on a different reporting schedule than most U.S. financial firms.

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