Bank Earnings: Bank of America, Goldman Sachs and Morgan Stanley to Report Next Week

Bank of America, Goldman Sachs and Morgan Stanley report earnings next week. Here’s a look at what might be expected from the three big banks for the second quarter.

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Round two of bank earnings kicks off next week. Bank of America (BAC) reports before market open Monday, Goldman Sachs (GS) before the open Tuesday and Morgan Stanley (MS) before the open Wednesday. 

This morning brought results from JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C). JPM topped earnings and revenue estimates, and its trading division revenue rose 13%. C beat earnings estimates and revenue was in line with expectations. Revenue in C’s trading division was pressured as a result of a 6% revenue decline in fixed income trading, which management attributed to “a more challenging market environment.” WFC missed estimates on both the top and bottom line. 

All six of the big banks dropped at the open of Friday’s trading session, with BAC, GS and MS mirroring the moves of the three that reported today. They’ve all since recovered from their morning lows, although performance remains mixed halfway through the day, with some still in the red and some slightly positive. 


BIG BANKS 2018 PERFORMANCE. The chart above shows the year-to-date performance of Bank of America (BAC, yellow line), Goldman Sachs (GS, purple line) and Morgan Stanley (MS, teal line). So far this year, the major banks and the financial sector as a whole have been lagging the S&P 500’s (SPX) performance. Year-to-date performance as a percentage is shown on the right hand side of the chart. Chart source: thinkorswim® by TD Ameritrade.   Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Bank of America Earnings and Options Trading Activity

After it passed this year’s stress tests, BAC raised its quarterly dividend from $0.48 to $0.60 per share. At the same time, it also raised its buyback authorization to $20.6 billion.  

When BAC last reported, revenue in its consumer banking and global wealth and investment management divisions were up in the mid-to-high single digits, while revenue in the global markets and global banking were down slightly. 

Despite a 38% increase in equity trading revenue in Q1, a 13% decline in revenue from fixed income, currency and commodity (FICC) trading weighed on results in the global markets division. 

For Q2, BAC is expected to report adjusted EPS of $0.56, up from $0.46 in the prior-year quarter, on revenue of $22.27 billion, according to third-party consensus analyst estimates. 

Around the upcoming earnings release, options traders have priced in about a 2% stock move in either direction, according to options data from the thinkorswim® platform

In short-term trading at the July 20 monthly expiration, calls have been active at the 29, 29.5 and 30 strike prices. Volume has been much lighter on the put side and concentrated at the 28 and 28.5 strikes. 

At the August 17 monthly expiration, trading on both the call and put side has been concentrated at the 29 strike price.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Goldman Sachs Earnings and Options Trading Activity

In the Fed’s recent stress tests, GS passed with some restrictions on the maximum amount it can return to shareholders over the next year, which the Fed limited to no more than $6.3 billion between Q3 2018 and Q2 2019. GS said it would repurchase up to $5 billion in shares and pay $1.3 billion in dividends, with plans to increase its quarterly payment from $0.80 to $0.85 in Q2 2019. 

When GS last reported, revenue grew 25% year over year to $10 billion, driven by double-digit growth across institutional client services, investing and lending, and investment management. Revenue in its trading division grew 31% to $4.39 billion, with a 23% increase in FICC trading and a 38% increase in equity trading. 

For Q2, GS is expected to report adjusted EPS of $4.67, compared to $3.95 last year, on revenue of $8.74 billion, according to third-party consensus analyst estimates. 

Around the upcoming earnings release, options traders have priced in a 2.1% stock move in either direction, according to options data from the thinkorswim® platform.

At the July 20 weekly expiration, recent call trading has been heaviest at the 230-strike call, with decent volume at both the 225 and 227.5 strike prices over the past few days as well. Trading has been lighter on the put side, with most of the activity at the  225, 227.5 and 230 strikes. 

Looking further out at the August 17 monthly expiration, short-term trading on both the call and put side has been concentrated at the 225 and 230 strike prices. 

Morgan Stanley Earnings and Options Trading Activity 

MS also passed the Fed’s stress tests with a limit on the maximum amount of capital it can return to shareholders. Following the tests, MS said it plans to repurchase up to $4.7 billion of shares and increase its quarterly dividend from $0.25 to $0.30 per share. In total, it expects its capital distributions to be in line with its 2017 capital return program, which totaled $6.8 billion. 

In its Q1 report, MS’ revenue was up 14% year over year to $11.1 billion. MS indicated that the largest driver of that growth was from sales and trading in its institutional securities business, which increased to $4.4 billion, from $3.5 billion in the same period last year. 

When MS reports Q2 results, it is expected to report adjusted EPS of $1.11, up from $0.87 in the prior-year quarter, on revenue of $10.1 billion, according to third-party consensus analyst estimates. 

Options traders have priced in about a 2.4% stock move in either direction around the upcoming earnings release, according to options data from the thinkorswim® platform. 

In short-term trading at the July 20 weekly expiration, calls have had higher volume at the 48 and 48.5 strike prices, while puts have been active at the 47 and 48 strikes. 

At the August 3 weekly expiration, there are several strikes on the call side with high open interest. The 49, 51 and 52-strike calls all have around 7,000 contracts open, while all of the other strike prices right around the money have less than 100 contracts open currently. 

Looking further out at the August 17 monthly expiration, recent trading has been heavier on the call side and concentrated at the 49 and 50 strike prices. Put volumes have been lighter and spread out across a range of strikes. 

Next up in Earnings

The pace of earnings reports continues to pick up next week as the Q2 season gets underway. In addition to the banks, some of the major reports include: 
  • Netflix (NFLX) after market close Monday, July 16
  • Johnson & Johnson (JNJ) before market open Tuesday, July 17
  • IBM (IBM) after market close Wednesday, July 18
  • Microsoft (MSFT) after market close Thursday, July 19 
  • General Electric (GE) before market open Friday, July 20
Good Trading,
JJ

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