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Q1 Earnings for Big Banks Expected to be Dismal; Improvements on Horizon

Well, it is earnings season time again. Companies begin to report their earnings for the first quarter on Monday, with the traditional season opener Alcoa (AA) leading the way. However, the stocks I will be watching most closely are big bank stocks, particularly considering the industry regulations they have had to deal with so that the banking debacle of 2008 won’t occur again.

The street expects for bank earnings for Q1 2016 to be bad. Most analysts forecast that earnings for the biggest banks to be down 20% for the largest banks, according to Thomson Reuters.

The big players

The big banks consist of JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C) and Goldman Sachs (GS).

JPMorgan is up first, reporting on April 13. It is also the largest of the group in terms of market cap, followed by Bank of America and Wells Fargo, which report on April 14. Then Citigroup, which reports on April 15. Goldman Sachs reports the following week on April 19.

Playing on a new field

For all of the big banks, trading was sluggish and volatile during the first quarter of the year. Declines in commodities prices aggravated the situation. While some of the banks saw trading activity increase last month, observers say it was not enough to make up for the declines in January and February.

Banks have also been challenged by restrictions on proprietary trading, which have left them less profitable. Larger capital required to participate in fixed-income trading has also been a challenge.

They are also still dealing with the effects of the new rules that went into governing derivatives. The rules went into effect in 2010 due to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Specifically, the act requires banks to post billions of dollars of collateral for certain derivatives trades.

Analysts who follow the performance of these banks have been lowering their first-quarter estimates all quarter. Reuters reported the following:

JPMorgan is expected to report adjusted earnings of $1.30 per share, Bank of America to report 24 cents per share, Wells Fargo to report 99 cents per share, Citigroup to report $1.11 per share, and Goldman is expected to report $3.00 per share. In fact, observers say Goldman Sachs had the worst quarter of all of the banks, with one report saying it has had the lowest first-quarter earnings since before the financial crisis.

Bank of America to report 24 cents per share, Wells Fargo to report 99 cents per share, Citigroup to report $1.11 per share, and Morgan Stanley to report 63 cents per share. Goldman is expected to report $3.00 per share, the lowest first-quarter earnings since before the financial crisis.

While there are skeptics, I think that the banks that are able to generate good returns above their costs of capital stand to improve their financials over the course of this year and into next year. If they can maintain or improve their credit qualities and increase their capital levels, they could be good choices for investors whose tolerance has waned for these troubled banks. However, beware of companies that are trading below their tangible book values; this may signal their problems are insurmountable.

 

 

 

 

 

 





4 responses to “Q1 Earnings for Big Banks Expected to be Dismal; Improvements on Horizon”

  1. […] Martin on Q1 Earnings for Big Banks Expected to be Dismal; Improvements on Horizon […]

  2. Let’s hope big banks miss their targets. A further sell off would be fantastic. I’d like to buy more shares.

  3. amber tree says:

    Thx for this article.

    The XLF ETF is on my radar for put writing. I started looking at it again last Friday.. Good that you point out that it is earnings season and that analysts expect bad news. It might be an opportunity for some put writing soon then. I will wait a little more .

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