Equity investors braced for disappointing US bank earnings
Equity investors are marking down US banks that rely on trading revenues and international operations, rewarding the stronger growth prospects of domestic oriented and consumer-focused financials as earnings season heats up this week. Investors are braced for disappointing results from financials as analysts expect earnings for the sector will contract 3.9 per cent for the second quarter compared with the same period a year ago.
Within the broad financials group, however, there is a clear divergence between banks with a strong trading and global presence versus the domestic players that cater to commercial and retail customers across the US. The outperformance of domestic-orientated banks reflects a pick-up in the US economy, while banks with capital market franchises have suffered from a drop in trading volumes and tougher regulations. “Among major developed economies, the US stands out as doing better,” said James Paulsen, chief investment strategist at Wells Capital Management and who thinks the economy will expand north of 3 per cent during the second half of this year. This is illustrated by the share price for Wells Fargo, which is has risen 13 per cent so far this year, while Goldman Sachs is down 7 per cent and Citigroup has dropped nearly 10 per cent. Shares in JPMorgan Chase have fallen about 5 per cent, with Bank of America Merrill Lynch, which is primarily domestic though it has large trading operations, down just over 1 per cent in the year to date and Morgan Stanley flat. By contrast, shares in PNC and US Bancorp, two domestic banks, are up 12.6 per cent and 6.9 per cent respectively. These two groups did not have the litigation risk or the capital markets risk that had weighed on the shares of the large, diversified US banks since the financial crisis, analysts said. “There has been a chronic downgrading of valuations since 2008 for banks with a large capital markets mix,” said Mr Paulsen. Still, some weaknesses in domestic US banking began to show on Friday, when Wells Fargo broke its 12-quarter streak of record earnings per share. The bank kicked of the second-quarter earnings season, but its stock slipped nearly 1 per cent after it failed to counter a pronounced slump in mortgage refinancing. Jeff Rottinghaus, portfolio manager at T Rowe Price said financials were generally a lagging sector for equity investors: “There is some hope that fundamentals improve if interest rates go higher and net interest margins improve. Maybe heading into the midterm elections, banks also get some regulatory relief. And the stocks are relatively inexpensive versus the market.”