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Big Banks’ Q3 Earnings Releases on Oct 12: JPM, C, WFC & PNC


The third-quarter 2018 earnings season is already round the corner with big names — JPMorgan JPM, Wells Fargo WFC, Citigroup C and PNC Financial PNC — all reporting financial numbers tomorrow, before the opening bell.

After an impressive first-half 2018 performance driven by significant volatility, client activity remained low in the third quarter. Therefore, trading revenues of major banks are feared to have been negatively impacted.

Though higher inflation expectation, tightening of monetary policy by the Fed, the U.S.-China trade war and a sharp sell-off in the tech sector induced volatility in the first half of the year, uncertainty mainly related to the rising trade-war fears and some other geo-political tensions in the Sep-end quarter failed to significantly boost client activity. Therefore, not much support is expected from this source of revenues, primarily for big banks.

Additionally, investment banking is anticipated to display a disappointing performance for the to-be-reported quarter due to seasonality as well as a considerable reduction in equity underwriting volumes globally on trade-war fears. A fall in equity issuances across the globe might have resulted from reduced IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to have declined slightly.

Moreover, debt origination fees will likely have remained low due to rising rates curbing corporates’ involvement in these activities. However, strong pipeline of M&As in the previous quarters might have offset slowdown of these activities in the quarter to some extent.

Mortgage business is anticipated to have continued to witness a slowdown in the July-Sept quarter. With interest rates moving higher, refinancing activities and fresh originations have been slowing down. Therefore, no major help is anticipated from this source.

Nonetheless, a moderate improvement in lending — mainly in the areas of commercial and industrial, and consumer — will likely energize interest income for banks. Despite flattening of the yield curve and gradual increase in deposit betas in the third quarter, rise in interest rates (in June and September) is likely to have offered some support.

Additionally, credit quality is likely to have remained strong, backed by an improving economy and conservative underwriting standards.

On the cost front, while the absence of considerable legal expenses since the last few quarters is encouraging, increased investments in technology to boost digital offerings may have escalated costs moderately. In addition, passage of the new law to lessen banks’ regulatory burden and lower tax rates will have supported bottom-line growth.

Per our latest Earnings Preview, overall earnings for the major banks in third-quarter 2018 are projected to rise 9.3% year over year.

Let’s take a look at the four major banks scheduled to announce their results tomorrow.

JPMorgan will report the third-quarter earnings before the opening bell. With a Zacks Rank #3 (Hold) and Earnings ESP of 0.00%, we cannot conclusively predict that the bank will beat the Zacks Consensus Estimate this time. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Seasonality hurt its investment banking revenues in the quarter under review. Also, decline in global M&A deal volume will likely have hampered the company’s advisory fees to some extent. Nevertheless, JPMorgan's top position in garnering global investment banking fees and the solid M&A deal pipeline, over the previous quarters, are projected to have provided the bank some leverage in the quarter to be reported.

Developments like further escalation in the trade war and some other geo-political tensions in the quarter were inadequate to significantly boost client activity. However, a slight improvement in lending scenario — mainly in the areas of commercial and industrial, and consumer — will likely lead to an increase in net interest income (NII). A rise in interest rates (in June and September) will offer support despite flattening of the yield curve and steadily increasing deposit betas in the third quarter (Read more: Mute Trading Activities to Hurt JPMorgan Q3 Earnings).

Notably, JPMorgan surpassed the Zacks Consensus Estimate in all the trailing four quarters, as shown in the chart below:

On Friday, yet another big bank, Wells Fargo, is also slated to announce its quarterly results. Wells Fargo is likely to have benefited from easing margin and high interest income, though marginally, in Q3. Particularly, weakness in revolving home equity loans might have offset growth in commercial and industrial (C&I) and consumer loans to some extent. Nonetheless, mounting expenses driven by legal costs and low mortgage business are expected to dent the banking giant’s results. (Read more: Will Mortgage Weakness Hurt Wells Fargo's Q3 Earnings?).

Wells Fargo surpassed the Zacks Consensus Estimate in one of the trailing four quarters, as demonstrated in the chart below:

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise | Wells Fargo & Company Quote

For another big bank, Citigroup, we cannot conclusively predict an earnings beat in the quarter, as investment banking performance is anticipated to have been dismal in the third quarter on seasonal nature of the industry, as well as significant reduction in equity underwriting volumes globally. Moreover, volatility-driven fixed income and trading revenues are expected to have remained flat to slightly higher on a year-over-year basis in the Sep-end quarter. Furthermore, credit costs might have escalated and hurt financials. Nevertheless, the company is anticipated to witness improvement in consumer banking revenues, while pressure on margins is likely to somewhat ease. (Read more: Will Industry Seasonality Dampen Citigroup's Q3 Earnings?).

Further, this Zacks #3 Ranked stock surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as reflected in the chart below:

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise | Citigroup Inc. Quote

Likewise, PNC Financial is also scheduled to report results, tomorrow. Given the improvement in the lending scenario, net interest income (NII) is expected to reflect improvement, while flattening of yield curve may somewhat hurt. Also, given the continued momentum in customer activity, in terms of using credit and debit cards, consumer services revenues are likely to improve. Additionally, although the performance of the equity markets was not very impressive, the company’s asset management revenues are expected to witness a rise, supported by higher earnings from its equity investment in BlackRock. Nonetheless, with a slowdown in refinancing activities during the quarter, due to the continued rise in rates, mortgage originations have declined. Thus, residential mortgage revenues are also expected to remain lower.

However, management expects non-interest expenses to remain stable on a sequential basis, as the company’s continued efforts toward its cost-saving program is likely to keep overall expenses under control. (Read more: Will Fee Income Support PNC Financial in Q3 Earnings?)

Having beaten estimates in each of the last four quarters, PNC Financial posted an average beat of 2.8%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Check later our full write-up on earnings releases of these stocks.

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