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Bearish on Upcoming Banking Earnings? Bet on These ETFs

Zacks Equity Research

The financial sector has been in a tight spot this year despite a Fed lift-off last December. Global growth worries prevalent for the most part of 1H16 and Brexit shockers actually bumped up demand for safe-haven assets like Treasury bonds, pushing bond yields down to record lows this month. Needless to say, this kind of an interest rates’ backdrop would hurt banks’ profitability in the Q2 earnings season by shrinking net interest margin.

InsideLikely Banking Earnings Blues

Most central banks across the developed region that were already accommodative are now mulling over more stimulus measures to wait out the intense Brexit upshot. Even the Fed, which was turning hawkish, got back its good old dovish tone to address global market threats and moderation in U.S. growth.

As a result, reduced capital market activity and risk-off trade sentiments are likely to weigh on investment banking activities and trading revenues. Big banks are likely to be more hurt than regional banks as the former has greater exposure to ailing foreign economies.

As noted in a Wall Street Journal article, “higher lending profit and stable fee income will lift earnings at regional U.S. banks about 2% in the second quarter from a year earlier” per an analyst. But the KBW Nasdaq Bank Index, consisting of bigger banks, is expected to see an average earnings reduction of 0.9% in Q2, as per FactSet data.

Moreover, U.S. banks’ operations are highly dependent on Britain. And earnings of large U.S. banks could be down by 5.6% this year and as much as 9% next year on Brexit, as per Keefe, Bruyette & Woods (read: 6 Sector ETFs Threatened by Brexit Uncertainty).

Below we highlight earnings surprise predictions of big banks, compiled by Zacks, which are scheduled to report soon and see how things are shaping up numerically prior to their earnings releases.

Inside Surprise Prediction

JPMorgan Chase & Co. JPM has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%, at the time of writing. Our proven model does not conclusively show that JP Morgan is likely to beat on earnings since a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen. Further, the stock has an unfavorable VGM score of F. The company is expected to report on July 14.

Wells Fargo & Company WFC has a Zacks Rank #4 (Sell) and an Earnings ESP of negative 0.98%. So chances of a beat are slim here again. The stock has a poor VGM score of “D’. The company will report on July 15.

Citigroup C is also expected to release its earnings report on July 15. It has a Zacks Rank #4 and an Earnings ESP of 0.00%, another tough case for a beat. Further, the stock has the worst VGM score of ‘F’.

Bank of America Corporation BAC – a Zacks Rank #3 stock with a VGM score of ‘D’ – is expected to report on July 18. It has an Earnings ESP of negative 2.86%. The company witnessed negative earnings estimate revision of three cents to $0.35 per share over the past 90 days for the second quarter.

The Goldman Sachs Group GS is expected to release its earnings report on July 19. It has a Zacks Rank #3 but an Earnings ESP of 0.00%, which makes surprise prediction difficult. But there was a steep downward revision in earnings estimates (by 40 cents) over the past 90 days for the to-be-reported quarter. Further, the stock has a VGM score of ‘D’.

Morgan Stanley MS – yet another company with Zacks Rank #3 and a VGM score of ‘F’ has an earnings ESP of 0.00%. However, a negative earnings revision (by 7 cents to $0.60) over the last 90 days fuels bearish sentiments.

ETFs to Play

Given the downbeat operating backdrop and a volley of negative Earnings ESP, cases for banking earnings beat are not strong this season. If banking stocks come up with downbeat numbers, financial ETFs heavy on these stocks will invariably be hurt (read: Bank ETFs in Trouble?).

But investors still have options to profit out of this gloom. These choices are mainly inverse ETFs though a regular ETF can be at investors’ discretion to wait out this lull.

ProShares Short Financials ETF SEF

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Financials Index (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).

ProShares UltraShort Financials ETF SKF

This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Financials Index.

ProShares UltraPro Short Financial Select Sector ETF FINZ

The fund provides three times (3x) inverse exposure to the S&P Financial Select Sector Index.

Direxion Daily Financial Bear 3x Shares ETF FAZ

This product also provides three times inverse exposure to the Russell 1000 Financial Services Index (read: 16 Highly Traded Leveraged/Inverse ETFs of 2016).

ProShares Short S&P Regional Banking KRS

The product looks to offer daily investment results that correspond to the inverse of the daily performance of the S&P Regional Banks Select Industry Index (read: Six Ways to Short Financial Stocks with ETFs).

ProShares S&P 500 ex-Financials SPXN

The regular ETF provides exposure to companies of the S&P 500 with the exception of those that are included in the financial sector (read: S&P 500 ETFs Vs Ex-Sector ETFs).

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JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
PRO-SH SP5 XFIN (SPXN): ETF Research Reports
 
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