Bank Stocks Had a Bonanza in 2019. Earnings Will Be More Blah.
January 12 2020 - 7:42PM
Dow Jones News
By Ben Eisen and David Benoit
Falling interest rates were a mixed bag for big U.S. banks last
year. That should be evident when they report fourth-quarter
earnings this week.
The Federal Reserve cut interest rates three times last year, an
about-face after raising rates nine times in the previous three
years. Lower rates crimp what banks can charge on loans, reducing
the profitability on lending operations. But they can also fuel
demand for loans and let banks lower what they pay for
deposits.
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo &
Co. report quarterly results Tuesday, followed by Bank of America
Corp. and Goldman Sachs Group Inc. on Wednesday. Morgan Stanley
reports Thursday.
Banks are closely watched because their results typically
reflect the health of the broader U.S. economy, which has slowed in
recent months but generally remained strong.
KBW analysts expect big banks to post roughly 6% growth in
fourth-quarter earnings compared with the prior year. But they
expect earnings to fall about 6% from the third quarter.
Net interest income, the amount banks make from lending minus
what they pay out on deposits, fell quarter over quarter throughout
2019 after a streak of 15 straight gains. That is unlikely to
improve much in the new year with rates expected to stay
stable.
That will put a greater focus on the other side of revenue: the
fee-generating businesses included in noninterest income. Those
revenues have been rising as banks try to expand in areas
considered more stable than Wall Street, such as wealth management
and consumer lending.
But lower rates have been a boon for consumer businesses such as
housing and car loans. Lenders made $700 billion in mortgages in
the third quarter, boosted by customers rushing to refinance. That
was the most for a quarter since before the financial crisis,
according to industry research group Inside Mortgage Finance.
That hot streak is expected to remain largely intact, which
should boost banks with big mortgage arms like Wells Fargo and
JPMorgan. Freddie Mac said last week that the average rate for a
30-year fixed mortgage fell to 3.64%, its lowest level in 13
weeks.
The business lending environment has been less sanguine, as
executives fret over a continued trade war between the U.S. and
China. Many companies, flush with debt after years of cheap
borrowing, are opting not to take on more, analysts said. The pace
of commercial and industrial loan growth slowed throughout 2019,
according to Federal Reserve data.
Quarterly investment-banking revenue should look strong, but
that will be partly because of an easy comparison: Results were
dismal in the fourth quarter of 2018. Zooming out from the quarter,
trading revenue has been trending down across the industry. Banks
are cutting costs and competing fiercely for clients, driven by a
belief that only a few top shops can be profitable.
In banks' corporate-advisory businesses, results have been
mixed. Global equity sales and mergers and acquisitions were down
last year, though big-fee megamergers and debt deals were up,
according to Dealogic.
One factor that has been helping banks' earnings over the past
couple of years: buybacks. In the third quarter, Bank of America,
Wells Fargo and JPMorgan were among the top four buyers of their
own shares in the S&P 500, according to S&P Dow Jones
Indices.
All told, S&P 500 financial firms bought back almost $48
billion of shares in the third quarter, the most in records going
back to 1998. Buybacks pull part of a company's stock out of the
market, so its per-share earnings can improve even if its
underlying profits don't.
Partly because of buybacks, bank stocks had a strong run in
2019. JPMorgan, Bank of America and Citigroup all rose more than
40%, topping the broader market.
Financials are still cheaper than the broader S&P 500, but
they are getting more expensive. The S&P 500 financial sector
now trades at around 13 times expected earnings over the next 12
months, versus less than 11 times a year earlier.
Write to Ben Eisen at ben.eisen@wsj.com and David Benoit at
david.benoit@wsj.com
(END) Dow Jones Newswires
January 12, 2020 19:27 ET (00:27 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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