JPMorgan, Bank Of America Earnings Seen Hurt By Q1 Stock Volatility
The horrendous start to the first quarter for stocks, coupled with losses in energy and commodities, is expected to kick bank earnings in the teeth as JPMorgan Chase ( JPM ), Bank of America ( BAC ) and others report this week. Plunging oil prices in January and February sent the market into a tailspin, lodging its worst-ever start to the year. Accordingly, a weak environment for trading and capital markets is expected to hurt banks. JPMorgan and Citigroup ( C ) are among the lenders who have issued warnings on trading revenue. JPMorgan, which reports Wednesday, is expected to see its earnings decline 13% to $1.26 a share, according to estimates compiled by Thomson Reuters. Revenue is expected to fall 5.5% from a year earlier to $23.4 billion. The New York-based bank’s shares tumbled 10.3% during the first quarter. In February, the nation’s largest bank warned that its trading revenue should decline 20% in the quarter. The drop in trading revenue is expected to be exacerbated by the surge of the Swiss franc in January 2015, resulting in tough year-over-year comparisons. But CEO Jamie Dimon said at the time that improved market conditions in March could help. Dimon himself helped out in February, when he bought $26 million of JPMorgan shares. The bank also boosted its energy loan-loss reserves by $500 million for the quarter, though oil prices have rebounded somewhat since falling below $27 a barrel earlier in the quarter. BofA Earnings Bank of America, which reports Thursday, is seen earning 21 cents a share in Q1, down 22% from a year earlier, while its revenue is expected to decline 5.2% to $20.4 billion. The Charlotte, N.C.-based lender’s shares plunged 20% in Q1. Q1 typically is the strongest quarter of the year, but weak trading and investment banking revenue this year “would set up for a tough operating environment through the rest of 2016,” according to Jason Goldberg, an analyst at Barclays, in a research note last week. Wells Fargo’s Revenue To Rise Wells Fargo ( WFC ), which is also slated to report on Thursday, is expected to earn 97 cents a share, down 6.7%. But revenue is expected to grow a modest 1.6% to $21.6 billion. Its stock slipped 11% in Q1. The San Francisco-based bank focuses more on lending to consumers and businesses. As a result, it isn’t quite as exposed to stock market fluctuations as some of its rivals. But Wells Fargo set aside $1.2 billion last quarter for nonperforming energy loans. Also looming overhead is the constant concern over how many times the Federal Reserve will hike interest rates this year. After December’s 0.25 percentage-point increase, some Fed officials talked about four hikes in 2016. But the stock market’s gyrations, coupled with weak overseas economic growth, has led some to speculate that there will be two rate hikes — or maybe even none. Net Interest Margins In a healthy economy, higher interest rates help boost banks’ net interest margins, a key measure of profitability. A bank’s net interest margin is the difference between the interest it pays out to depositors and the interest it charges borrowers. “We want to see higher rates for the right reasons,” said Jeffery Harte, an analyst at Sandler O’Neill & Partners. “If the economy is strong enough to handle higher rates, that’s good news for the banks as well.” Analysts at Barclays said they’re closely watching Wells Fargo’s mortgage activity. UBS analysts last month rated Wells Fargo a sell, arguing that its portfolio is tilted toward risky energy and auto loans. Most analysts remain positive on Wells Fargo. Citigroup, Morgan Stanley, Goldman Sachs Citigroup will earn $1.06 a share, a 30% decline, analysts expect. The revenue forecast is for a tumble of 11% to $17.6 billion. The New York-based bank’s stock fell 19% during Q1. Citi reports Q1 results on Friday. In March, CFO John Gerspach warned that fixed-income trading is expected to fall 15% in Q1 and investment banking revenue is seen declining 25%. Morgan Stanley ( MS ) and Goldman Sachs ( GS ) report Q1 results next week. Both investment banks are expected to post year-over-year declines in EPS and revenue. Image provided by Shutterstock .