Earnings seasons kicked off on a sour note as Alcoa (NYSE:AA) missed its third-quarter expectations Tuesday afternoon. Later this week, banks take the stage with reports from JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) early Friday morning, while Bank of America (NYSE:BAC) and the investment banks wrap it up.
The banks have been in the limelight this quarter, starting with the Fed’s decision to leave rates unchanged and a number of new scandals. Meanwhile, both presidential candidates have taken aim at Wall Street with the hope of imposing greater regulation on big banks over the next 4 years. As a result, the financial sector has been one of the worst-performing sectors this year. The Financial Select Sector SPDR ETF (NYSE:XLF) is down 16% in the past 3 months and 18% in the last 30 days. These upcoming reports need to instil confidence in investors that the sector can turn around its misfortunes moving forward.
JPMorgan Chase (NYSE:JPM) Financials – Diversified Financial Services
JPMorgan is the biggest of the retail banks in terms of assets under management. Its large asset base and robust balance sheet have left the company vulnerable in the event of another crisis. In the past few quarters, JPMorgan has posted better than expected earnings and revenue. This is unfortunately a matter of circumstance rather than exceptional business performance. Expectations have been set fairly low for the sector, so topping them is a relatively easy feat. JPM should continue to see pressure on interest income while rates remain at all time lows. Meanwhile, additional pressure overseas and looming uncertainty in Europe post-Brexit could have negative ramifications. That said, improving economic conditions, particularly in the energy market, should ease loan loss reserves against energy. Furthermore, consumer and community banking, investment banking and commercial banking continue to make gains on a year-over-year and sequential basis. Expectations for this upcoming quarter have been relatively muted. Analysts at Estimize are calling for earnings per share of $1.41 on $23.97 billion in revenue. Compared to a year earlier, this represents a 7% increase on the bottom line and 2% on the top.
Wells Fargo (NYSE:WFC) Financials – Commercial Banks
Wells Fargo’s situation is only about to get worse after its third-quarter report this Friday. The company was recently caught in a multi-year scandal in which they were creating millions of fake accounts without customer authorization. Wells Fargo agreed with regulators to a miniscule $185 million fine but most of the damage has been to it’s reputation. Wells Fargo was a trusted bank best known for handling mortgages and loans across its vast customer base. Clearly its trustworthiness has quickly disappeared and soon so will its customers. Just yesterday, CEO and Chairman John Stumpf resigned from his position under the belief that he was becoming a distraction to the bank. This has been perceived as relatively good news for investors but won’t mean much for earnings. Wells Fargo is about to take a massive hit as they will no longer realize revenue from the millions of fraudulent accounts in the past.The Estimize consensus is calling for earnings per share of $1.02 on $22.04 billion in revenue. Shares are down 16% year to date and should fall even further given the recent news.
Bank of America (NYSE:BAC) Financials – Commercial Banks
Bank of America has been one of the best performers in the sector over the past 3 months. After hitting yearly lows following the shocking Brexit vote, shares have surged nearly 25%. The bank’s results have otherwise been disappointing for the the past few quarters. Both earnings and revenue have slowly decelerated while also falling short of analysts’ expectations. Bank of America, like the rest of the sector, is holding out for a rate hike that will jumpstart revenue and income growth. Investment activity has already started to show signs of improvement, primarily given the ongoing oil recovery and stock-market rally. This upcoming report will have to top expectations for shares to continue rising at their current pace. The Estimize consensus is calling for earnings per share of 35 cents on $20.83 billion in revenue, reflecting a 4% decline on the bottom line.
Goldman Sachs (NYSE:GS) Financials – Commercial Banks
Goldman Sachs and Morgan Stanley (NYSE:MS) were dealt a huge blow last month when the Fed proposed a plan that would require the banks to hold extra capital when dealing in physical commodities. Under the plan, banks would have to hold up to $4 billion in extra capital, a move meant to lessen risk and tighten trading activity. Goldman’s commodities franchise is set to be hit hardest by the new rule as it is a large supplier of crude oil and natural gas across North America. Fortunately, the ongoing boom in the markets will help propel trading and investment banking revenue. Furthermore, Goldman wasn’t subject to any substantial litigation fees or fines that often drag down profitability. The Estimize community is looking for earnings per share of $3.90 on $7.55 billion in revenue. Compared to a year earlier this represents a 34% increase on the bottom line and 10% on the top. That’s a significant improvement from the negative growth posted in recent quarters.