By Peter Rudegeair
Big banks have weathered years of low interest rates,
billion-dollar fines and many regulatory constraints on their
businesses. Their latest challenge: living up to lofty investor
expectations.
Prospects of President-elect Donald Trump bringing a more benign
approach to Wall Street has sent the KBW Bank Index up around 23%
since Election Day, a gain that is nearly four times the rise in
the S&P 500 index over the same period. And analysts have
raised the bar on fourth-quarter earnings estimates at the big
banks on account of better trading conditions and higher
anticipated income from loans and securities because of rising
interest rates.
With J.P. Morgan Chase & Co., Bank of America Corp. and
Wells Fargo & Co. set to release results on Friday, the
question is whether they can live up to the optimism priced into
their shares. And there is quite a bit of that, especially when
compared with this time last year.
Back then, falling oil prices, fears about a hard landing in
China and slowing economic growth around the world had some
investors fearing a 2008-style meltdown was looming. While banks
proclaimed robust balance sheets, their shares traded at deep
discounts. Shares in Bank of America, for one, traded around just
55% of book value, or its net worth, at one point.
Today, Bank of America stock is within striking distance of book
value, a valuation it last garnered in September 2008.
"We're in the opposite of where we are last year," said Marty
Mosby, an analyst with brokerage Vining Sparks IBG LP. "What we
[now] need is the actual realization of fundamental improvement in
the banks to justify further movement higher in the stock
price."
Over the past 90 days, analysts polled by Thomson Reuters have
increased their average, per-share estimates for banks'
fourth-quarter earnings. Goldman Sachs Group Inc.'s and Morgan
Stanley's profit forecasts have risen by 16% and 12%, respectively.
Estimates for Bank of America Corp., Citigroup Inc. and J.P. Morgan
have increased between around 2% and around 5%; at Wells Fargo,
which is still grappling with fallout from its sales-tactics
scandal, estimates have declined by around 1%.
Over this same time, forecasts for 2017 full-year earnings have
risen as well. For J.P. Morgan, they are up 4.8% over the past
three months to $6.50 per share; for Goldman, analysts have raised
projections 9% to $18.70 a share.
While longer-term catalysts such as a reconfiguration of
corporate-tax rates or changes to the 2010 Dodd-Frank regulatory
overhaul will take months or years to play out in Washington, the
outlook for the banks' bread-and-butter businesses of trading
stocks and bonds and making loans will be of more immediate concern
to investors.
So far, there are positive signs. Bond-trading volumes were up
sharply in the fourth quarter of 2016, especially for municipal and
mortgage bonds, according to data from the Securities Industry and
Financial Markets Association. As a result, overall bond-market
trading volumes did something they haven't done since 2008: record
an annual increase.
Thanks in part to the year-end trading surge, average trading
volume for the year was the highest since 2013. In fact, 2016
marked the first year since 2008 in which the annual average volume
exceeded that of the prior year, ending the long, postcrisis trend
toward ever lower volumes, Sifma data show.
Much of that should flow to banks' top lines. At an investor
conference in early December, the chiefs of J.P. Morgan and
Citigroup predicted overall trading-revenue gains of around 15% and
20%, respectively.
Coming on the heels of stronger trading results in the second
and third quarters, the hope for banks is that Wall Street has now
turned a corner after years of contracting fixed-income
revenue.
Banks should also get a boost from higher interest rates,
although the impact will take time to flow through to profits. The
Federal Reserve's boost in short-term interest rates in December
increased the yields banks earn on credit cards, home-equity lines
of credit and other consumer loans.
Although the Fed's move occurred too late in the quarter to be a
significant source of profit, banks also stand to benefit from a
rise in long-term bond yields. This increase gave banks an
opportunity to move customer deposits into securities that offered
a higher return than just a few months ago.
The difference, or spread, between 10-year and two-year
Treasurys, a rough measure of bank profitability, rebounded to 1.24
percentage points at the end of December after hitting a nine-year
low of 0.76 percentage points in July, according to data from
FactSet.
Banks will be relying on higher earnings yields to power profits
as growth in important parts of their loan portfolios has started
showing signs of slowing. Commercial and industrial loans, which
expanded by more than 8% in the third and fourth quarters of 2015,
grew by only 3.7% in the third quarter of 2016 and only 2.9% in
November, according to Federal Reserve data.
So far, the market's reaction to the banks' new operating
environment has been more optimistic than analysts'. In a research
note this week, Sanford C. Bernstein said current bank-stock prices
implied that the industry's earnings-per-share in 2017 would be
around 14% higher than their current estimates when using banks'
historical price/earnings ratio as an anchor.
Some analysts are already recommending that clients take profits
on their bank holdings. On Tuesday, analysts at Citigroup
downgraded Goldman Sachs, arguing that to justify the current level
of returns the market is pricing in, the investment bank would need
to generate an additional $4 billion of revenue above current
estimates.
"The path is relatively uncertain and the bar is relatively
high," the analysts wrote.
--John Carney contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
January 11, 2017 14:03 ET (19:03 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From Apr 2024 to May 2024
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From May 2023 to May 2024