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Industry Spotlight > Wirehouse Firms

Bank Analysts Say ‘Steady On’: Q4 Earnings Preview

By Jane Smith

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Goodbye Alcoa. On Friday, investors will be greeted with banking news at the kickoff to the fourth-quarter earnings season with reports from Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC).

Analysts, generally speaking, have mixed expectations for these banks and other large financial firms.

“In general, fourth-quarter reports are expected to demonstrate limited revenue growth and strong expense control,” Richard Bove, vice president of equity research at Rafferty Capital Markets, stated in a recent research note.

“Results could be moderately better but not in line with the stock price increases. This creates a potential risk,” Bove added.

He says weak loan growth in the commercial and industrial sectors during the fourth quarter of 2016 is weighing on earnings, while real estate lending has slowed, too.

Universal bank analysts at Keefe, Bruyette & Woods, however, expect fourth-quarter results to show improving company fundamentals, and they anticipate further improvements in 2017.

“We updated estimates in the fourth quarter of 2016 (post-election) to reflect a better rate environment,” explained Brian Kleinhanzl and Michael Brown in a report earlier this week.

The group lowered its estimates for both Bank of America and Wells Fargo, though along those for Goldman Sachs, Morgan Stanley and State Street. But it raised them for Citigroup (set to report results on Wednesday) and Bank of New York (reporting Thursday).

“Our eyes will be focused on trading results to ensure that there is a persistency to better revenues year over year. We forecast trading revenues to be up 16% year over year, on average, for the group,” they stated.

Financial sector analysts also will be watching net interest income growth.

“We are expecting net interest margins will expand 2 basis points for the group, on average, and we expect a further expansion by 6 basis points and 9 basis points in 2017 and 2018, respectively,” the KBW team said.

While they foresee Goldman Sachs posting top-line growth above expectations thanks to better trading results on Wednesday, the analysts expect Wells Fargo’s net interest margin to contract — an anomaly for the group.

Plus, Wells Fargo is likely to benefit less than peers from a better trading environment, “since it is less of total revenues and we are cautious on mortgage banking looking forward,” KBW says.

As for Bove, he insists investors remain cautious.

“The expectation is that 2017 results will [include] more positive growth, but this is highly dependent on the ability of the industry to grow its loan portfolio and control costs,” he said. “It will not be due to changes in interest rates. If investors do not realize this, these stocks will be at risk.”

— Check out 12 Best & Worst Broker-Dealers: Q3 Earnings, 2016 on ThinkAdvisor.

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