With Q3 earnings season almost here, investors are eagerly waiting for the results of the mega banks, which remained in the spotlight throughout the quarter for a number of reasons.
After decent first-half results, major banks’ performance is expected to be dismal this time. A dismal lending scenario — mainly in the areas of commercial and industrial, and commercial real estate — during the third quarter is expected to have had an adverse impact on net interest income (NII), while decent consumer loan growth might have been an offsetting factor.
Further, the Federal Reserve’s accommodative monetary-policy stance with decline in interest rates (two rate cuts — in July and September), flattening of the yield curve and steadily rising deposit betas are likely to have hurt banks’ net interest margins (one of the key metrics for gauging banks’ profitability) in the to-be-reported quarter.
Dismal capital markets performance is also a matter of concern. During the third quarter, several lingering concerns, including uncertainty related to the U.S.-China trade war and Brexit, and expectations of global economic slowdown persisted. The Fed’s accommodative monetary-policy stance and many geopolitical matters led to ambiguity too. All these factors weighed on investors’ minds, resulting in lower client activity. Thus, overall trading revenues are likely to have been muted in the to-be-reported quarter.
Overall, investment banking activities were subdued in the third quarter due to seasonality among others. Moreover, marginal increase in consumer spending and subdued business investments amid trade tensions hit the M&A and IPO activities. Thus, growth in advisory fees is projected to have been hampered.
Despite a decent equity market performance, equity issuance is likely to have been weak. However, lower rates might have aided debt issuances to some extent in the third quarter. Hence, equity underwriting fees and debt origination fees are anticipated to have been adversely impacted.
In a reversal in trend, mortgage banking business is expected to have provided some support to banks’ fee income. While concerns like muted home equity loan growth, heightening competition and fall in home-buying appetite continue to hurt mortgage banking fees, lower mortgage rates, which drove the refinancing activities, are expected to have partially offset these woes.
Expense reduction, which has helped banks remain profitable, is unlikely to have been a big support, as these companies have already slashed the majority of unnecessary expenses. While the absence of considerable legal expenses over the last few quarters is encouraging, increased investments in technology to improve digital offerings as well as starve off competition from fintech firms might have escalated costs moderately.
In the S&P 500 universe, the Zacks Finance sector’s total earnings, of which major banks account for nearly 45%, are projected to increase 1.2% year over year in the quarter to be reported. This comes in lower than 4.3% growth recorded in the last reported quarter.
(For detailed look at the earnings outlook for this industry and others, please read our Earnings Outlook article.)
Selecting the Winners
This is the right time for you to select some banking stocks that are well positioned to beat earnings estimates in their upcoming releases.
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
4 Major Banks Set for Earnings Surprises
Here are four major regional bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
M&T Bank Corporation MTB is slated to release results on Oct 17. The company has an Earnings ESP of +0.34% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Citigroup C has an Earnings ESP of +0.55% and at present, holds a Zacks Rank of 3. It is slated to report quarterly figures on Oct 15.
The Bank of New York Mellon Corporation BK is scheduled to release results on Oct 16. The company, which currently carries a Zacks Rank of 3, has an Earnings ESP of +0.11%.
The Earnings ESP for JPMorgan Chase & Co. JPM is +0.07% and it holds a Zacks Rank of 3, at present. The company is set to report quarterly numbers on Oct 15.
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