The earnings season is knocking at the door and investors are keen to see how major banks have performed in the second quarter amid uncertainty related to the trade war fears.
After impressive first-quarter 2018 results, major bank stocks’ performance lost some steam. The primary reason is the flattening of the yield curve. As such, net interest margin (one of the key metrics for gauging banks’ profitability) is expected to be subdued in the second quarter.
Also, growth in trading revenues, which was one of the main supporting factors during the first quarter, is likely to be muted. Though the second quarter witnessed uncertainty mainly related to the U.S.-China trade war and some other geo-political tensions, it wasn’t sufficient.
Further, investment banking performance is anticipated to be flat. A rise in equity issuances across the globe might have gotten a boost from IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to improve slightly. Also, increasing M&As will likely support banks’ advisory fees to some extent. These are, however, expected to be more than offset by lower debt origination fees, as rising rates will limit corporates’ involvement in these activities.
Dismal mortgage banking performance is also expected to continue in the second quarter amid rising interest rates as mortgage originations and volume declined.
Nevertheless, a decent improvement in lending, particularly in the areas of commercial and industrial, and consumer will offer support banks’ interest income while weakness in revolving home equity loans is expected to persist.
Further, asset quality is anticipated to remain strong, backed by an improving economy and conservative underwriting standards.
Increased investment in technology to strengthen digital offerings and initiatives to expand into newer areas are expected to result in a slight rise in expenses. But, increase in overall non-operating expenses is likely to be manageable.
Further, passage of the new law to lessen banks’ regulatory burden and lower tax rates will support bottom-line growth.
Hence, major banks on the S&P 500 Index (accounting for nearly 45% of the Zacks Finance sector‘s total earnings) are expected to witness 8.2% year-over-year earnings growth in the to-be-reported quarter. Yet, this compares unfavorably with 25.4% growth recorded in the prior quarter.
Picking the Potential Winners
While the upcoming results are not likely to be impressive, there are still a few major banks that are expected to outshine their peers. So, this is the right time for you to select some banking stocks that are well positioned to beat earnings estimates in their upcoming releases.
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
5 Major Banks Set for Earnings Surprises
Here are five major bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
JPMorgan (NYSE:JPM) is slated to release results on Jul 13. The company has an Earnings ESP of +0.75% and carries a Zacks Rank of 3.
The Earnings ESP for Comerica (NYSE:CMA) is +0.48% and it carries a Zacks Rank of 3. The company is scheduled to release results on Jul 17.
M&T Bank (NYSE:MTB) has an Earnings ESP of +0.58% and carries a Zacks Rank of 2. It is slated to report results on Jul 18.
KeyCorp (NYSE:KEY) is scheduled to release results on Jul 19. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.70%.
The Earnings ESP for SunTrust Banks (NYSE:STI) is +0.43% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 20.
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