Bank earnings: ‘Lower for longer’ means buybacks will continue

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When big banks kick off the third-quarter earnings season next week, a familiar theme is likely to dominate: it’s hard to make money in a lower-for-longer world.

Analysts expect banks to report tepid growth in nearly all their business lines, from mortgage originations to investment banking to lending, and most of the good news story is likely to come from a practice that’s often considered a sign that companies are out of ideas: issuing debt to buy back stock.

J.P. Morgan Chase & Co.

JPM, -0.30%

kicks off earnings season Thursday, followed that day by Citigroup Inc.

C, -0.32%

On Friday, Bank of America Corp.

BAC, -0.39%

reports, followed by Wells Fargo & Co.

WFC, +0.09%

 

“Results are likely to be tepid due to very weak loan growth, modest increase in net interest margins, and weak capital markets related trends,” somewhat offset by lower expenses and better-performing loans, wrote J.P. Morgan analyst Vivek Juneja in a note Friday.

“On average, most of the (quarter-over-quarter) EPS growth in 3Q is likely to be led by share buybacks at our banks,” Juneja added.

Here’s what to expect:

Mortgage originations will be down for all the banks, according to data from the Mortgage Bankers Association. Refinance volumes have long been expected to dwindle, as nearly every American who could refinance already has. And the home-purchase market has ground to a halt this year thanks to a dearth of supply.

Lending of nearly every stripe has been lukewarm, said Chris Whalen, a longtime bank analyst and principal of Whalen Global Advisors LLC. The commercial real estate boom is slowing down, he said. Federal Reserve data show commercial and industrial lending down 0.4% for the quarter, but up 2.7% for the year, Juneja wrote.

Investment banking will also be a weak spot, analysts believe. Juneja cited Dealogic data that shows fees are down 8% for the year to date compared to 2016. And trading revenues will take a hit from subdued volatility.

Banks’ ability to buy back their stock—and their role in helping companies issue debt to fund their own buybacks—is one of the few saving graces this quarter, Whalen believes. The banks had a blowout response to the Federal Reserve’s 2017 stress tests.

Also read: Fed stress tests show banks could withstand a deep downturn

With all that in mind, many bank analysts are still bullish on the stocks—in part because they believe there’s nowhere to go but up.

“The credit crisis troubles have been healed in terms of rebuilding balance sheets, capital, liquidity, and the losses are as low as they’ve ever been since the early 1990s,” said David Hendler, an analyst with Viola Risk Advisors.

Hendler believes the big banks are all well-positioned to take advantage of ongoing growth in the economy and the rise of millennial consumers.

Most analysts believe Wells Fargo will have some explaining to do, in the wake of a disastrous performance by CEO Tim Sloan, who appeared before Congress for a progress report one year after the bank first settled with regulators for opening phony customer accounts.

Also read: ‘What in God’s name were you thinking?’ senators grill Wells Fargo CEO

Sloan “has got to go,” Hendler told MarketWatch. “At a minimum it’s an optics problem. Having said that, it’s still a great core franchise. We’ve been a buy on their stock since early to mid 2017 recognizing that they were making the right changes.”

Whalen is a bit more sanguine on the banks’ business models in the post-crisis world. As the Fed continues to normalize monetary policy, it’s working against the world’s other central banks. That’s pulling foreign money into the U.S., which pushes rates lower.

“By definition it’s harder for banks to make money today,” Whalen said.

Earnings estimates for next week’s reports are as follows:

JPM: Analysts polled by FactSet are expecting J.P. Morgan to report per-share earnings of $1.65, compared with $1.58 a year ago. Estimize, which crowdsources estimates from analysts, academics, and investors, expects EPS of $1.71.

The bank is expected to report revenues of $25.2 billion, versus $25.5 billion a year ago, FactSet analysts said. Estimize forecasts revenue of $25.6 billion.

Citi: FactSet analysts forecast Citi will report per-share earnings of $1.32, up from $1.24 a year ago. Estimize’s consensus is for $1.33.

Citi is expected to report revenues of $17.9 billion, versus $17.6 billion a year ago, while Estimize analysts expect revenues of $17.8 billion.

WFC: Analysts surveyed by FactSet expect Wells Fargo to report EPS of $1.03, the same as in the year-ago period, while Estimize’s consensus is for $1.04.

The FactSet consensus for revenue is $22.4 billion, up from $22.3 billion a year ago. Estimize analysts forecast revenues of $22.3 billion.

BAC: Per-share earnings for Bank of America are forecast to be $0.46, compared to $0.41, FactSet analysts think. Estimize expects 48 cents.

The bank’s revenues are expected to be $22.0 billion, versus $21.6 billion a year ago, according to FactSet analysts. Estimize’s consensus is for $22.4 billion.

Stock price reaction:

Stock price performance among the big banks range from a 27% year-to-date gain for Citi to a 0.1% uptick for Wells in the same period. Shares surged last winter on hopes of stronger inflation and looser regulation, but have fallen back to earth since. The Financial Select Sector SPDR exchange-traded fund

XLF, -0.19%

  has risen 13% so far in 2017, just below the performance of the S&P 500

SPX, +0.18%

which is up 14%. The Dow Jones Industrial Average

DJIA, +0.18%

 has gained about 15%.

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