Don’t bet on strong bank earnings
REACTIONS were mixed as the first of the season’s US bank earnings rolled in last week. Some analysts – like GFT’s David Morrison – were blaming poor revenue growth reported by Citigroup and Bank of America-Merrill Lynch (BoA-ML) on Friday for the subsequent dip in the S&P 500 as it plunged 2.09 per cent in less than two hours.
Morrison thinks that the failure of banks to significantly grow revenues highlights that the stimulus programme is wearing off to leave a very weak set of fundamentals. He adds that earnings figures are being flattered by very low expectations.
Others, however, explained Friday’s drop as showing the unimportance of second quarter earnings in the context of the US’s continuing weakness. “Investors are more concerned about the US economy than they are about earnings,” says CMC Markets’ Michael Hewson. “Earnings are rear-view mirror stuff – the last quarter. We’ve seen Citi and JP Morgan beating expectations yet we are quite a lot lower.”
Whether or not this week’s rash of US bank earnings figures (see calendar) will have any bearing on the stock markets, spread betters can attempt to target earnings directly by betting on bank equities. BoA-ML’s stock price declined over 7 per cent on Friday, for example, while Citi fell 3.7 per cent in early-morning US trading. This was despite both banks meeting expectations – but this only shows how pessimistic the markets are: BoA-ML’s net profit was down 1.85 per cent on the previous quarter, while Citi’s net profit plunged 39 per cent on the first quarter of 2010.
But exceeding expectations and increasing profits seemed to have little more effect than meeting them. Despite JP Morgan’s 44 per cent rise in profits on last quarter, announced Thursday, the bank was swept up in Friday’s falls, albeit less than its rivals. So figures might provide some insulation but are not enough to outweigh macroeconomic factors.
Moreover, investment banking revenue was down on the first quarter for both Citi and JP Morgan (36 per cent and 23.8 per cent respectively). This does not bode well for this week’s Goldman Sachs and Morgan Stanley releases as they rely more heavily on investment banking income.
But this does not explain the Friday sell-off. It could be that the Financial Reform Bill, which included a ban on banks’ proprietary trading and increased capital requirements, caused investors to turn bearish on the sector. But the likelihood is that the outlook for US banks is more closely tied to the fortunes of the US economy as a whole than to earnings or regulation. In particular, bank stocks are likely to be affected by the property market, to which many lenders still have an unknown exposure.
Some see this as a reason to be more optimistic. Charles Schwab’s Kully Samra says that banks’ property market loans might not be as toxic as some predict. He says: “Mortgage delinquencies are actually down 7.5 per cent from 2009’s fourth quarter – the first drop in over two years.”
In the short-term, however, there are few signs of a full-blown housing recovery and many unknown factors are still at play on bank balance sheets. That might mean that even if we see a stellar season of earnings, banks will fail to shake off the gloom.
CALENDAR | EARNINGS 19-22 JULY
Monday 19 July
Texas Instruments – US
IBM – US
Eurotunnel – France
Tuesday 20 July
Enterprise Inns – UK
William Hill – UK
Severn Trent – UK
Apple – US
BNY Mellon – US
Johnson & Johnson – US
Yahoo – US
Goldman Sachs – US
Hermes – France
Alstom – France
Accor – France
Wednesday 21 July
Blacks Leisure Group – UK
GlaxoSmithKline – UK
Coca-Cola – US
Manpower – US
Starbucks – US
eBay – US
BlackRock – US
Wells Fargo – US
Morgan Stanley – US