News Column

Don't Expect Bank Earnings to Shine in Q2

July 10, 2014

John Waggoner, @johnwaggoner, USA TODAY

Wells Fargo (file image)
Wells Fargo (file image)

The only thing lower than bank CD rates are analysts' expectations for second-quarter bank earnings.

Wells Fargo kicks off the second-quarter bank earnings reports on Friday, with Citigroup, JPMorgan Chase, Bank of America, and U.S. Bancorp and Capital One all reporting next week.

Banking analysts at Keefe Bruyette & Woods expect Wells, the largest U.S. bank by market capitalization, to report $1 in earnings per share for the second quarter, a 5.4% fall from the first quarter and a 3.1% rise over the second quarter of 2013.

Wells, which has seen 17 consecutive quarters of rising profits, could be the highlight for the financial services sector. FactSet's survey of analysts' estimates shows the group's earnings falling 3.2% in the second quarter from a year ago. It's the only one of 10 sectors in the Standard & Poor's 500-stock index to show a decline. Why the dismal outlook?

•Lending. Banks -- and investors -- had hoped that the spring home-buying season would be stronger than it was. "It didn't grow to the extent that more bullish people thought," says Chris Mutascio, analyst at Keefe Bruyette & Woods.

•Trading. Big banks often make profits by trading securities, but trading profits have been sinking steadily for the past three quarters. In part, that's because markets have been less volatile. Traders need strong trends up or down to make money. It may also be that banks are much more sensitive to the effects of trades gone bad, and kept trading desks under tighter reins.

•Crime.Many of the largest banks are paying enormous settlements to the U.S. government due to their roles in the economic collapse of 2007-2009, when banks made risky mortgage loans and sold them to unwitting investors. According to The Wall Street Journal, Citigroup is set to pay a $7 billion settlement for its role in the meltdown.

Aside from the massive fines -- investors consider them a one-time charge -- banks are seeing ongoing legal expenses soar, as well as their costs to prevent further fines. "It's a good time to be in the compliance department," says Anton Schutz, portfolio manager at Burnham Financial Services fund.

•Rates.Banks have cut expenses; now they need higher profit margins to increase earnings. They probably won't get those until the Federal Reserve raises short-term interest rates. Banks typically get higher margins when rates rise, because they raise rates on deposits more slowly than rates on loans.

While the outlook isn't great, it's not dismal, Mutascio says. "Expectations are for banks to see continued loan growth at a moderate clip." Auto loans, in particular, have been a growth area, so much that the Comptroller of the Currency warned last month about signs of increased risk in auto lending.

Financial stocks have been laggards. The Financial Select Sector SPDR has gained 4.8%, including reinvested dividends, while the S&P 500 has gained 7.4%. Although big banks have struggled, smaller banks are seeing higher loan demand -- and the most merger and acquisition activity since 1998, Schutz says.

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Original headline: Bank earnings not expected to shine


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