The Philippine Star

Lower Q3 earn­ings seen for US banks

- Business · Finance · Stocks & Markets · Banking · Financial Markets · US Stock Markets · Americas Stock Markets · United States of America · New York County, NY · Citigroup · Wells Fargo · JPMorgan Chase · Goldman Sachs Group · Bank of America · U.S. Treasury · Federal Reserve System · John Hancock · S&P 500 · FactSet Research · Keefe, Bruyette & Woods · Manulife Financial · American Bankers Association

NEW YORK (Reuters) – The big­gest US banks are ex­pected to kick off the earn­ings sea­son on a sour note this week due to fall­ing in­ter­est rates, which may have pres­sured net in­ter­est mar­gins enough to cause the sec­tor’s first year-over-year earn­ings per share de­cline in three years.

While strength in mort­gage bank­ing and cheap val­u­a­tions could pro­vide sup­port to the S&P 500 bank in­dex, its per­for­mance de­pends on what re­as­sur­ance ex­ec­u­tives pro­vide on credit con­di­tions, the out­look for loan growth and their abil­ity to re­duce de­posit costs dur­ing their con­fer­ence calls.

Tues­day brings third quar­ter profit re­ports from Cit­i­group Inc., Wells Fargo and Co., JPMor­gan Chase & Co., and Gold­man Sachs. Bank of Amer­ica re­ports on Wed­nes­day.

The big­gest US banks will re­port a 1.2 per­cent de­cline in third-quar­ter earn­ings, while rev­enue is seen ris­ing 0.9 per­cent, ac­cord­ing to data ag­gre­gated by Refini­tiv an­a­lyst David Aure­lio. This would be the first profit de­cline since the same quar­ter in 2016, ac­cord­ing to data from Fact­set.

“Over­all it’s shap­ing up to be a pretty chal­leng­ing quar­ter be­cause of the net in­ter­est rate en­vi­ron­ment,” said Fred Can­non, di­rec­tor of re­search for Keefe, Bruyette & Woods in New York, cit­ing the flat­ten­ing and tem­po­rary in­ver­sion of the US Trea­sury twoyear/10-year yield curve dur­ing the quar­ter.

Bank prof­its de­pend heav­ily on net in­ter­est in­come, or the dif­fer­ence be­tween the rate they charge for long-term loans and the rate they pay for short­term bor­row­ing.

Ex­ec­u­tives from Citi, Wells Fargo and JPMor­gan all cut their full-year fore­casts for net in­ter­est in­come last month, cit­ing macroe­co­nomic con­cerns.

Part of the prob­lem is US Fed­eral Re­serve in­ter­est rate cuts in July and Septem­ber. And fu­tures traders are bet­ting on more Fed rate cuts go­ing for­ward, in­clud­ing one in Oc­to­ber.

As a re­sult, bank in­vestors will lis­ten for ex­ec­u­tive re­as­sur­ance on the net in­ter­est mar­gin out­look and their abil­ity to mit­i­gate weak­ness, said Man­ulife In­vest­ment Man­age­ment’s Lisa Welch, who man­ages the John Han­cock Re­gional Bank Fund.

One off­set to lower lend­ing prof­its would be a re­duc­tion in in­ter­est rates banks pay their cus­tomers for de­posits, as those rates rose while the Fed was hik­ing in­ter­est rates.

“There’s go­ing to be a lot of ques­tions on how fast banks are able to bring down their de­posit costs as loan yields are com­ing down,” said Welch, ad­ding that she does not ex­pect de­posit costs “to come down as quickly as loan yields have fallen.”

Mortgages may be an­other sil­ver lin­ing to lower rates in third-quar­ter num­bers and fu­ture quar­ters as bor­row­ers avail of cheaper rates. Re­fi­nanc­ing, which ac­counts for most mort­gage ap­pli­ca­tions, has more than dou­bled from a year ago, ac­cord­ing to Mort­gage Bankers As­so­ci­a­tion data.

“With rates be­ing lower, we think mort­gage ac­tiv­ity will be very strong,” said Welch, point­ing to First Hori­zon as one bank that could ben­e­fit from mort­gage de­mand.

Bank of Amer­ica and Wells Fargo should also ben­e­fit, ac­cord­ing to KBW’s Can­non. To cope with ris­ing de­mand, Wells Fargo is boost­ing its mort­gage team, ac­cord­ing to a memo seen by Reuters this week.

But in­vestors will also be on high alert for signs slow­ing US eco­nomic growth is hurt­ing debt re­pay­ments, said Mike Cronin, in­vest­ment man­ager at Aberdeen Stan­dard In­vest­ments.

“Given that we’ve had some eco­nomic data that’s been a lit­tle weaker is there any trend in credit costs that raises con­cerns go­ing into 2020?” said Cronin.

So far, strong credit qual­ity and bank bal­ance sheets have re­as­sured KBW’s Can­non, who is neu­tral on the sec­tor. “But if we start to see mean­ing­ful credit de­te­ri­o­ra­tion that would change our minds about how we think about the banks,” he said.

Can­non did not rec­om­mend buy­ing banks go­ing into earn­ings sea­son due to the like­li­hood “con­sen­sus es­ti­mates come down in the quar­ter.” But on the plus side, he said.

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