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Are Bank ETFs Good Buys Before Earnings Release?

Sanghamitra Saha

It’s time for full-fledged releases of quarterly earnings. Big banks will start reporting from this week. Let’s dig deeper into the likely earnings picture of the big six banking companies that could drive the performance of the sector ahead. For the Finance sector, total Q4 earnings are projected to be up 19.6% from the year-ago quarter on 3.5% higher revenues, per the Earnings Trends issued on Jan 9, 2019 (read: 4 Sector ETF & Stock Picks to Bet on Ahead of Q4 Earnings).

According to our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Inside Our Surprise Prediction

Among the big six, Citigroup Inc. C is likely to report today. At the time of writing, Citi has a Zacks Rank #3 and an Earnings ESP of 0.00%. It doesn’t make it a sure-shot candidate for an earnings beat.

Zacks Rank #3 JPMorgan Chase & Co. JPM is likely to report on Jan 15. The same is the surprise prediction for JPM as it also has an Earnings ESP of 0.00%. The stocks have a VGM Style Score of F and D, respectively, and hail from a bottom-ranked Zacks Industry (bottom 21%).

On Jan 15, Wells Fargo & Company WFC, with a Zacks Rank #3 and an ESP of negative 0.74%, will report earnings results. This lowers the predictive power of ESP because a favorable Zacks Rank when combined with a negative ESP makes surprise prediction difficult. It has a VGM Score of C.

Bank of America Corporation BAC is expected to report on Jan 16 before the market opens. The stock has a Zacks Rank #3 and an ESP of -0.23%. Needless to say, here also, surprise prediction is tough. BAC has a VGM Score of D.

On Jan 16, GoldmanSachs Group Inc. GS is likely to come up with its earnings release. Goldman has a Zacks Rank #4 and a VGM Score of F and an ESP of negative 7.36%. This once again makes chances of an earnings beat poor. It has a VGM Score of F and it belongs to a bottom-ranked Zacks Industry Rank (bottom 22%).

Morgan Stanley MS is likely to come up with their earnings releases. Morgan Stanley has a Zacks Rank #3 and an ESP of +0.83%. When you combine this positive Earnings ESP with the stock's Zacks Rank #3, it shows that a beat is possibly around the corner. The stock also has a good VCM Score of B and it comes from a bottom-ranked Zacks industry (bottom 22%).

What Does ESP Tell About Bank ETFs?

As discussed above, chances of a broad-based earnings beat are anything but likely. The fourth quarter of 2018 has dealt with the heightened worries of flattening yield curve, which is negative for bank stocks.  The benefits of tax cuts that started being realized at the start of 2018 also faded at the end of the year.

Market Impact

Still, investors pinning their hopes on a tightening of the yield curve this year thanks to Fed comments of late and cheaper valuation, must be keen on knowing how financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, Invesco KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH are performing before the earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Goldman has moderate exposure in the aforementioned ETFs, rather it is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI. All these ETFs were in line with the S&P 500-based ETF SPY in the last 10 days (as of Jan 11, 2019) and returned in the range of 3.86% to 6.83% (read: Buffett Bets Big on Banks: Should You Tap Financial ETFs?).

So, keep a watch on financial ETFs. After all, FDIC-insured banks recorded an all-time high profit of $62 billion in the third quarter of 2018, which is up nearly 30% compared to the previous year.

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