The financial sector, which accounts for around one-fifth of the S&P 500 index, started this year as a laggard. Industry dynamics for the banking and brokerage space weakened considerably due to lackluster activities both at household and corporate levels, increased regulatory scrutiny and a soft capital market business (read: What is Driving Bank ETFs Lower?).
However, a turnaround was noticed in the second quarter as earnings releases from the major banks released last week were encouraging. Almost all bellwethers in this corner of the market crushed estimates. Let’s dig a little deeper into the big banks’ Q2 earnings to see what might be in their cards:
Results in Detail
Apart from Wells Fargo & Company (WFC), all the companies under our consideration – Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS ) beat the top and bottom-line estimates.
Wells Fargo earned $1.01/share in 2Q14, achieving the eighteenth consecutive quarter of earnings per share growth. Results improved from $0.98/share earned in the year-ago quarter.
The reported figure however only matched the Zacks Consensus Estimate. The quarter’s total revenue came in at $21.1 billion, outpacing the Zacks Consensus Estimate of $20.7 billion. However, revenues were down 1.4% year over year.
Goldman earned $4.10 per share in Q2, up from the year-ago earnings of $3.70 as well as ahead of the Zacks Consensus Estimate of $3.07. Net revenue jumped 6% year over year to $9.1 billion surpassing the Zacks Consensus Estimate of $7.9 billion. Year-over-year improvement in revenues, after a considerable period, is worthy of mention.
Morgan Stanley has routinely posted positive surprises, delivering another beat in its latest release. Adjusted earnings came in at $0.60 per share which outdid the Zacks Consensus Estimate of $0.55 and improved from the prior-year quarter figure of $0.45. Net revenue (excluding DVA adjustments) went up 2% to $8.5 billion and exceeded the Zacks Consensus Estimate of $8.2 billion.
Citigroup also posted an earnings beat back to back. Its Q2 earnings of $1.24 per share outpaced the Zacks Consensus Estimate of $1.08 and declined a penny from the prior-year earnings. Revenues dropped 6% year over year to $19.3 billion but surpassed the Zacks Consensus Estimate of $18.8 billion.
JP Morgan also came up with inspiring numbers this season. Its earnings of $1.59 per share outdid the Zacks Consensus Estimate of $1.30, but narrowly missed the year-ago number of $1.60. Net revenue of $25.3 billion, though down 2% from the year-ago quarter, was above the consensus estimate of $23.7 billion.
Takeaways from This Season
While we are surely excited about a whole lot of surprises (on both lines), investors should note that revenue growth seems far from stable. Net revenues remained weak on a year-over-year basis for most big banks. It was probably persistent expense management that helped the big caps to score on bottom line results.
In fact, the Zacks Industry Trends also noted that total earnings for the 12 companies having reported till July 16, 2014 (out of 80 total in the index) are down 1.6% on 2.4% reduced revenues, with 83.3% beating on earnings and 50% beating revenue estimates.
As per the Zacks Industry Trends, the financial sector will see 2.3% bottom-line expansion in Q2 but slip 3.6% on the top line. In fact, as of now, the broader financial sector is predicted to witness a revenue decline in the remaining two quarters of the year as well.
So, we can sum up that the ongoing season is the beginning of a trend reversal. The first quarter of next year should exhibit considerable gain on both lines; say 13% as the Zacks Industry Trends indicate.
Despite a string of earnings surprises from banks last week, a sense of apprehension was clear in the Financial ETF space. All the aforementioned companies have considerable exposure in funds like iShares U.S. Financial Services ETF (IYG), PowerShares KBW Bank (KBWB), Market Vectors Bank and Brokerage ETF (RKH), Financial Select Sector SPDR (XLF), U.S. Broker-Dealers Index Fund (IAI) and Vanguard Financials ETF (VFH) (see all the financial ETFs here).
IYG, KBWB and VFH shed 0.15%, 0.87% and 0.8% respectively while the other three RKH, XLF and IAI somehow managed to return, respectively, 1.55%, 0.04% and 0.99% last week. Overall, the financial ETFs saw flat trading.
We note that the underlying drivers of the space are shaping up well, though slowly. Loan growth is picking up pace with the improvement in economic activity. The investment banking corner should also see stepped-up business thanks to multi-year high deal activities in the U.S. ranging from merger and acquisition to IPOs (read: Deal ETFs in Focus on Flurry of M&A Activity).
Though the interest rate environment is not in favor of the sector at present and thereby bothering the insurance-related zone the most, the scenario might change soon when the Fed leaves the QE-era and decides to hike interest rates (read: Top Ranked Insurance ETF in Focus: IAK).
Thus, investors with a long-term focus and interested in investing via basket approach, might tap some of the financial ETFs on their present undervalued status. Investors should note that some of these including XLF and VFH are Buy-rated with XLF carrying a Zacks ETF Rank #1 (Strong Buy) and VFH has a Rank #2 (Buy).
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