Hopes run high ahead of J.P. Morgan, Bank of America and Wells
Fargo reports Friday
By Peter Rudegeair
Big banks have weathered years of low interest rates,
billion-dollar fines and many regulatory constraints on their
businesses. Their latest challenge: living up to lofty investor
expectations.
Prospects of President-elect Donald Trump bringing a more benign
approach to Wall Street have sent the KBW Bank Index up nearly 24%
since Election Day, a gain that is nearly 3 1/2 times the rise in
the S&P 500 index over the same period. And analysts have
raised fourth-quarter earnings estimates for the big banks on
account of better trading conditions and higher anticipated income
from loans and securities because of rising interest rates.
With J.P. Morgan Chase & Co., Bank of America Corp. and
Wells Fargo & Co. set to release results on Friday, the
question is whether they can live up to the optimism priced into
their shares. And there is quite a bit of that, especially when
compared with this time last year.
Back then, falling oil prices, fears about a hard landing in
China and slowing economic growth around the world had some
investors fearing a 2008-style meltdown was looming. While banks
proclaimed robust balance sheets, their shares traded at deep
discounts. Shares OF Bank of America, for one, traded around just
55% of book value, or its net worth, at one point.
Today, Bank of America stock is within striking distance of book
value, a valuation it last garnered in September 2008.
"We're in the opposite of where we are last year," said Marty
Mosby, an analyst with brokerage Vining Sparks IBG LP. "What we
[now] need is the actual realization of fundamental improvement in
the banks to justify further movement higher in the stock
price."
Over the past 90 days, analysts polled by Thomson Reuters have
increased their average per-share estimates for banks'
fourth-quarter earnings. Goldman Sachs Group Inc.'s and Morgan
Stanley's profit forecasts have risen by 16% and 12%, respectively.
Estimates for Bank of America, Citigroup Inc. and J.P. Morgan have
increased between roughly 2% and 5%; at Wells Fargo, which is still
grappling with fallout from its sales-tactics scandal, estimates
have declined by around 1%.
Forecasts for 2017 full-year earnings have risen as well. For
J.P. Morgan, they are up 4.8% over the past three months to $6.50 a
share; for Goldman, analysts have raised projections 9% to $18.70 a
share.
While longer-term catalysts such as a reconfiguration of
corporate-tax rates or possible repeal of the 2010 Dodd-Frank
regulatory overhaul will take months or years to play out in
Washington, the outlook for the banks' bread-and-butter businesses
of trading stocks and bonds and making loans will be of more
immediate concern to investors.
So far, there are positive signs. Bond-trading volumes were up
sharply in the fourth quarter of 2016, especially for municipal and
mortgage bonds, according to data from the Securities Industry and
Financial Markets Association. As a result, overall bond-market
trading volumes did something they haven't done since 2010: record
an annual increase.
Thanks in part to the year-end trading surge, average trading
volume for the year was the highest since 2013. Much of that should
flow to banks' top lines. At an investor conference in early
December, the chiefs of J.P. Morgan and Citigroup predicted overall
trading-revenue gains of around 15% and 20%, respectively.
Coming on the heels of stronger trading results in the second
and third quarters, the hope for banks is that Wall Street has now
turned a corner after years of contracting fixed-income
revenue.
Banks should also get a boost from higher interest rates,
although the impact will take time to flow through to profits. The
Federal Reserve's boost in short-term interest rates in December
increased the yields banks earn on credit cards, home-equity lines
of credit and other consumer loans.
Although the Fed's move occurred too late in the quarter to be a
significant source of profit, banks also stand to benefit from a
rise in long-term bond yields. This increase gave banks an
opportunity to move customer deposits into securities that offered
a higher return than just a few months ago.
The difference, or spread, between 10-year and two-year
Treasurys, a rough measure of bank profitability, rebounded to 1.24
percentage points at the end of December after hitting a nine-year
low of 0.76 percentage points in July, according to data from
FactSet.
Banks will be relying on higher earnings yields to power profits
as growth in important parts of their loan portfolios has started
showing signs of slowing. Commercial and industrial loans, which
expanded by more than 8% in the third and fourth quarters of 2015,
grew by only 3.7% in the third quarter of 2016 and only 2.9% in
November, according to Federal Reserve data.
So far, the market's reaction to the banks' new operating
environment has been more optimistic than analysts'. In a research
note this week, Sanford C. Bernstein said current bank-stock prices
implied that the industry's earnings per share in 2017 would be
about 14% higher than their current estimates when using banks'
historical price/earnings ratio as an anchor.
Some analysts already are recommending that clients take profits
on their bank holdings. On Tuesday, analysts at Citigroup
downgraded Goldman Sachs, arguing that to justify the current level
of returns the market is pricing in, the investment bank would need
to generate an additional $4 billion of revenue above current
estimates.
"The path is relatively uncertain and the bar is relatively
high," the analysts wrote.
--John Carney contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
January 12, 2017 02:48 ET (07:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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