Bank of America, JPMorgan, Citigroup and AIG are part of Zacks Earnings Preview

For Immediate Release

Chicago, IL – January 09, 2017 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includesBank of America (NYSE: BAC – Free Report ), JPMorgan (NYSE: JPM – Free Report ), Citigroup (NYSE: C – Free Report ) and AIG (NYSE: AIG – Free Report ).

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Can the Bank Stock Rally Continue?

Bank Stocks have been impressive performers since the November election, with the Zacks Major Banks industry up +14.5% since November 8th, more than double the S&P 500 index’s +5.7% gain since then. Performance of some of the major banks like Bank of America (NYSE: BAC – Free Report ) : up +33.4% since November 8th), JPMorgan (NYSE: JPM – Free Report ) : up +23%),Citigroup (NYSE: C – Free Report ) : up +23%), and others has been even more impressive.

The immediate catalyst for this outperformance is the uptrend in interest rates, with the 10-year Treasury yield jumping more than 50 basis points since November 8th. Interest rates are like oxygen for banks, with low interest rates over the last few years as a result of deliberate Fed policy putting a lid on banks’ earnings power. Net interest margin, the difference between what banks pay their depositors and what they charge lenders, has been flat to down for the last few years. With revenue growth hard to come by as a result of this backdrop, banks were forced to maintain profitability by squeezing expenses out of their operations. Many in the market see this unfavorable run finally coming to an end, with interest rates steadily going up this year and beyond.

The likelihood of higher interest rates going forward isn’t the only bright spot for bank stock investors. Hopes remain high that the incoming administration will roll back all or most of the regulatory constraints resulting from the Dodd-Frank and other measures. Corporate tax reform is another potentially positive for the space as is the expectation of an elevated growth trajectory for the U.S. economy. All in all, the industry’s operating and regulatory outlook has never been this favorable in a long time. This has started showing up in bank stock EPS estimates as well, though the impact is most pronounced in expectations for the outer periods.

The chart below shows the stock price performance of the Zacks Major Banks industry (dark blue line) and how aggregate annual earnings estimates for the space have evolved lately. The notable element in this chart is the evolving picture for 2018 estimates (the red line whose recent portion has been highlighted). As you can see, estimates for 2017 have stabilized while the same for 2018 have notably turned around recently and started going up.

What Are Banks Expected to Report for Q4?

With Bank of America, JPMorgan and Wells Fargo reporting Q4 results this week (all reporting on January 13th), it will be interesting to see what they have to say about this changed operating environment. December-quarter EPS estimates for JPMorgan have moved up in recent days, though the same for Wells and Bank of America have been fairly stable.

For the Finance as a whole, of which the Major Banks industry is the biggest earnings contributor, total Q4 earnings are expected to be up +10.7% from the same period last year on +2.2% higher revenues. This would follow +12.3% earnings growth in Q3 on +4.9% higher revenues.

Easy comparisons at AIG (NYSE: AIG – Free Report ) are a big contributor to the sector’s strong expected growth in Q4; the insurance giant is expected to report a roughly +2.5 billion swing in profitability from the year-earlier level. Excluding the easy comparisons at AIG, total Finance sector earnings would be up +5.4% from the same period last year.

Please note that the Major Banks industry, of which JPMorgan, Bank of America and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

The sector’s earnings are on track to be flat in 2016. But they were expected to be up materially in 2017 and 2018 even before the aforementioned favorable developments.

With a number of policy oriented developments still to unfold after the new administration takes office, it is reasonable expect positive revisions to these expectations. And if that is the case, then bank stocks should continue their momentum. Valuations have no doubt caught up with underlying fundamentals, but they are by no means stretched relative to historical periods, particularly given the emerging interest rate trajectory.

Q4 Expectations As a Whole

The Q4 earnings season doesn’t take the spotlight for a few more days, but the reporting cycle has actually gotten underway already. We now have Q4 results from 21 S&P 500 members that get counted as part of the Q4 tally. All of these results are from companies reporting November fiscal quarter results. It is still too early to draw any firm conclusions from what we have thus far.

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +3.1% from the same period last year on +3.9% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

Note : Sheraz Mian regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the Zacks Earnings Trends report every week.

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