U.S. banks are poised to start reporting first-quarter earnings this week. Major players like JP Morgan and Wells Fargo will report on Apr 14, followed by Citigroup, Bank of America and Goldman Sachs on Apr 15. The first three months of this year has certainly been fraught with challenges for banks. After all, everyone suspects bank earnings are going to take a hit due to the initial impact of the coronavirus pandemic.
The Fed had trimmed its benchmark interest rate to 0% to provide support to the economy amid the pandemic. By trimming its short-term interest rates, the Fed aims to pump cash into the financial system, and help banks provide more loans to businesses and households. But low interest rates do cut into net interest income for banks. This is because lower interest rates will dent bank profits as they decrease the spread between what banks earn by funding longer-term assets, such as loans, and shorter-term liabilities.
Policymakers unanimously agreed to trim benchmark federal funds rate a full percentage point to a range of zero to 0.25%. Earlier in March, in a rare inter-meeting move, the Fed had trimmed its benchmark interest rate by half a percentage point to a range of 1-1.25%. The Fed mentioned that “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States and that the effects of the coronavirus will weigh on economic activity in the near-term and pose risks to the economic outlook.”
By the way, rising unemployment is expected to result in increased loan losses, something that will weigh on banks’ earnings. U.S. unemployment did rise to 4.4% in March from February’s 50-year low after companies laid off workers in the wake of the rapid spread of the COVID-19 outbreak and its impact on businesses.
Thus, for the Finance sector as a whole (Major Banks industry brings in roughly 45% of the sector’s total earnings), first-quarter earnings are expected to drop 7.1% despite 1.8% higher revenues (read more: What to Expect from Big Bank Earnings Amid the Coronavirus?).
But despite such discouraging predictions, not everything looks gloomy for banks. Optimists note that banks are currently far better placed than they were during the subprime mortgage crisis, which had occurred between 2007 and 2010. This is primarily because the Fed has stepped up its daily short-term lending to help business houses meet short-term financing requirements, including meeting payrolls.
And let’s admit that during the banking crisis, banks took a beating as the institutions couldn’t renew their charged-off real-estate loans because collateral properties shed a significant amount of value. But this time around, collateral is no longer a
Fed’s annual Comprehensive Capital Analysis and Review known as CCAR too confirmed that banks are well-prepared to combat the coronavirus crisis. The regulatory test proved that these financial institutions do have the necessary cushion to withstand a “severely adverse” economic condition.
What’s more, refinancing activity could be an area of growth. With the Fed trimming rates, long-term mortgage rates have declined, triggering homeowners to refinance their mortgages at low interest rates. Such in increase in applications bodes well for banks.
4 Bank Stocks to Gain Heading Into Q1 Earnings
The aforesaid factors will surely help some banks stay afloat this earnings season. This calls for keeping an eye on banks which are expected to report an uptick in first-quarter earnings. These stocks have an average four-quarter positive earnings surprise. Companies with positive earnings surprise are more likely to come up with positive results in the near term.
JPMorgan Chase & Co. JPM operates as a financial services company worldwide. It operates in four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM). The company has an average four-quarter positive earnings surprise of 9.6%. It is expected to report earnings results for the quarter ending March 2020 on Apr 14.
OP Bancorp OPBK operates as the bank holding company for Open Bank that provides banking products and services in California. The company has an average four-quarter positive earnings surprise of 10.5%. The company is expected to report earnings results for the quarter ending March 2020 on Apr 24.
BOK Financial Corporation BOKF provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. The company has an average four-quarter positive earnings surprise of 0.4%. The company is expected to report earnings results for the quarter ending March 2020 on Apr 22.
Sierra Bancorp BSRR operates as the bank holding company for Bank of the Sierra that provides retail and commercial banking services to individuals and businesses in California. The company has an average four-quarter positive earnings surprise of 7.9%. It is expected to report earnings results for the quarter ending March 2020 on Apr 27.
JPMorgan, OP Bancorp, BOK Financial and Sierra Bancorp currently have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Click to get this free report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report BOK Financial Corporation (BOKF) : Free Stock Analysis Report Sierra Bancorp (BSRR) : Free Stock Analysis Report OP Bancorp (OPBK) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research