NEW YORK (Reuters). Investors will focus on lowering profits, raising Federal Reserve rates and lowering interest rates, as major US banks begin what analysts expect to become the first quarter of corporate income cuts from 2016.
On Friday, April 12, JPMorgan Chase & Co and Wells Fargo & Co will publish the results in order to seriously begin the earnings season. Citigroup Inc and Goldman Sachs Group Inc will report next Monday, followed by Bank of America Corp and Morgan Stanley on Tuesday.
Following a cautious change in the Federal Reserve due to signs of weakness in the US economy and a subsequent drop in the yield on 10-year Treasury bonds, the S & P 500 reported a 2.3% increase in profit in the first quarter compared to the same period last year. with 8.2% projected six months ago, according to Refinitiv.
"The Fed has turned so sharply that it gives one pause about what they say about the economy,” said Chuck Carlson, executive director of Horizon Investment Services in Hammond, Indiana. "Fixed interest rate cuts are not good news for bank interest margins. It is no wonder that analysts underestimate profit estimates. ”
The change in central bank rate was hindered by what was a model for quarterly rate hikes against the background of signs of a slowdown in economic growth.
Slowdowns have also reached 10-year treasury yields. Yield on benchmark bonds reached a 15-month low in the first quarter, smoothing the yield curve and narrowing the gap between interest-bearing banks paying depositors and the interest they charge consumers, which is bad news for profits.
"That's why the ratings are down,” added Carlson. "(Analysts) fear that the interest margin for banks will grow, and there are serious concerns about credit growth.”
In the first three months of the year, the S & P 500 index recovered after a sale in December, adding 13.1%, which was the largest quarterly increase since 2009. But financial performance has given way to a wider market, gaining 7.9% for the quarter as a new minimum. - The interest rate rate, which contributed to the growth of other sectors, was an obstacle for banks.
Since October, analysts have sharply reduced their expectations for the profits of the S & P 500 in 2019, while estimates for the first quarter fell from 8.1% to an annual decline of 2.2%. This would mark the first quarter of negative growth after the "downturn” in revenues, which ended in 2016.
The partial closure of the federal government in January and the expected decline in trading income gave analysts an additional incentive to lower the profit estimates of banks in the first quarter.
In a KBW note from April 3, lead analyst Brian Kleinhantsl notes that the average annual revenue from operations with stocks and fixed income, currencies and commodities (FICC) for the quarter decreased by 15%.
"As for finance, the industry that has suffered the most is capital markets,” said Tajinder Dillon, senior research analyst at Refinitiv in London. "These downward revisions have intensified over the past 90 days. Of the six largest banks, Goldman Sachs, Morgan Stanley and JPMorgan showed the greatest decline in the first quarter earnings estimates.
But some analysts believe that the impact on banks of a more tailored Fed and a flattened yield curve is overestimated.
Oppenheimer's lead analyst Chris Kotovski wrote in a March 25 note that "of course, the rates and yield curve had an effect on bank income." But he called the influence of the Fed's decision "minor" and wrote that, in addition to these influences, "the basic principles of the bank are surprisingly stable."
Recent history shows that large US financial institutions beat analysts' estimates at a faster rate than the market as a whole. In the eight most recent quarters, six banks, on average, estimated profit rates in 83.3% of cases compared with the average frequency of strikes on the S & P 500 at 75.4%. In addition, bank revenues unexpectedly rose in 79.2% of cases, while revenues of S & P 500 companies outpaced analytical estimates in 68.3% of cases, according to Refinitiv.
In today's reality of the late cycle, however, it is not clear that banks can exceed even lower expectations. In any case, they should set the tone for what, according to analysts, will be a period of rocky income.
"Psychologically, these are giant companies that tend to influence sentiment,” Dillon added, suggesting that their quarterly reports are indirect indicators of corporate earnings. "Banks there."