JPMorgan Chase & Co. , Bank of America Corp and Citigroup Inc are all scheduled to report quarterly earnings during the week starting October 12. Based on the way bank stocks have behaved in the past couple of months, you would think that earnings are likely to disappoint. The specter of the all-too-familiar headwinds of low interest rates and weak trading activity have come back to haunt the sector.
Interest rates continue to remain low. The Fed’s decision to not increase rates in Sept, and a flattening yield curve, are likely to put further pressure on net interest margins.
Trading profits are also expected to take a hit. Equity and bond trading may have been okay during the quarter. But that improvement will not be enough to offset the weakness in a wide range of other financial instruments. This may be bad news, particularly for the big banks.
So what should investors look for when the “big 3” release results, starting with JPMorgan. Beyond the usual suspects, EPS and Revenue, watch out for these key figures.
JPMorgan Chase & Co. will report quarterly results on Oct 13. The nation’s biggest bank generates over 50 percent of its net revenue from non-interest income. This is good news; more so at a time when most major banks are earning considerably less from their asset portfolios. Investors should therefore not just rely on JPMorgan Chase & Co. ‘s top-line revenue figure. Make sure to check out the performance of its asset management and investment banking units.
The banking sector’s wide-spread revenue problems have also renewed calls to cut expenses. Investors should keep an eye on the direction of JPMorgan Chase & Co. ‘s operating expenses and efficiency ratio. Ideally, both of these should head lower.
Bank of America
Bank of America Corp will report earnings on Oct 14. The country’s second biggest bank has a stated target of earning 1 percent on assets. Prior to the financial crisis, that happened regularly. However, since then, it has always fallen short. Things are improving, and in the second quarter, the bank earned a 0.99 percent return on assets. Can it sustain that improving trend?
Ongoing legal expenses have also been a big Achilles’ heel for Bank of America Corp . Since 2008, the bank has shelled-out $64 billion in settlements and other legal costs. Thankfully, that has considerably declined after a New York court’s ruling that time-barred several billions of dollars in claims against the bank. Investors need to closely watch if legal costs are continuing to head in the right direction.
Citigroup Inc will report its third quarter numbers on Oct 15. The bank posted better than expected results in each of the past six quarters. CFO John Gerspach said that despite the current market volatility, the bank should perform well on the back of solid client activity.
Expenses should head lower after benefiting from last year’s repositioning costs. As for Citi Holdings, the cost of credit is forecast to rise compared to last quarter. However, no major increases in net credit losses are expected.
Interestingly, Citigroup Inc has managed to receive significant sell-side coverage, ahead of the quarterly results. Analysts at both Credit Suisse and Jefferies recently upgraded the stock to a “Buy.”