Big banks continue reporting next week, with Goldman Sachs, Bank of America, and Morgan Stanley all scheduled to share Q1 results.
Until recently, two of the banking sector’s major revenue rainmakers—mortgages and initial public offerings (IPOs)—were suffering a drought.
A slumping housing market that coincided with last fall’s higher mortgage rates had some analysts worried about big banks’ Q1. Others looked at a slow IPO market that got clipped by the long government shutdown and wondered how that might hurt banks’ business.
While it’s too late now to do much about Q1 fundamentals for the big banks, next week’s trio of major bank earnings—Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS)—comes right as things appear to be getting a bit better on the housing and IPO fronts.
Just about anyone who follows financial media probably heard about Lyft’s (LYFT) heavily publicized IPO last week. Now Uber, another ride-hailing service, is getting its IPO ready. Bloomberg reported that Uber has lined up Morgan Stanley to lead its IPO and that Goldman Sachs Group Inc. is expected to play a role.
Also, social media firm Pinterest could also have an IPO on the way, and Fortune said Goldman Sachs is one of the underwriters. Goldman Sachs is handling Slack’s IPO, according to CNBC.
This uptick in IPO business could be an interesting topic to listen for on some of the earnings calls this week, especially for GS and MS, which report Monday and Wednesday mornings before the open, respectively. Bank of America reports Tuesday morning before the open. The question is whether this pick-up in underwriting potentially has legs. A lot of that might depend on market performance in general, because IPOs tend to pop up more often when stocks are rolling along the way they have so far this year.
Housing is another area where some analysts expect more excitement after a few slow quarters. Recently, average 30-year mortgage rates slid to around 4.3%, from near 5% in late 2018, which conceivably could spark some demand. Some homebuilders have reported increased buyer interest lately, raising hopes that the housing market might recover from its slump. That’s one area where it might be interesting to hear what BAC executives say in their call, because BAC plays a big role in the mortgage industry.
It’s also going to be important for investors to get a sense of business lending from BAC, as we’ve seen capital expenditures look a little soft in recent months. If BAC is seeing more interest from businesses looking for loans to build their operations, that wouldn’t be a bad thing to hear about the economy.
On the other hand, the low volatility market environment so far this year could end up having a negative impact on investment banking businesses at both GS and MS. Last time out, MS got hit hard as its wealth management and fixed income trading businesses sagged in Q4, and the company missed third-party consensus estimates for both revenue and earnings per share.
Given the fact that every other major bank said they had trouble with trading in Q4, it shouldn’t seem too surprising that MS—the firm that’s taken the mantle on the trading business in recent quarters and relies more on trading than many of its competitors— should have some hiccups. The question is whether that spilled into Q1, too.
GS beat revenue and profit expectations back in Q4, and saw a gain in equities trading revenue offset a decline in bond trading revenue.
One thing to consider is that many investors know banks have had a rough ride, and they might be willing to give these companies a pass as long as their guidance for the rest of the year reflects some of these blooming positive trends in the economy, Briefing.com noted. Bank shares have recently been doing a little better after a weak open to 2019, and that might reflect some investor optimism.
Despite the optimism, negative fundamentals continue to raise concerns, including uncertainty about Brexit, the continued trade battles between the U.S. and Europe and the U.S. and China, and a slowing economy across the world’s biggest three markets (the same three now engaged in trade battles).
Also, the issue of low interest rates continues to dog banks across the spectrum. One major weight on bank stocks in Q1 was falling longer-term yields, so it could be interesting to see what executives have to say about how their companies are going to make money, as long-term rates are expected to stay low. They can only cut expenses so much with automation in branches. Investors may also want to tune in to see what executives might say about whether the slowdown in Europe and Asia might affect their overseas businesses.
When Bank of America releases results, it is expected to report adjusted EPS of $0.66, vs. $0.62 in the prior-year quarter, on revenue of $23.33 billion, according to third-party consensus analyst estimates. Revenue is expected to rise 0.3% year-over-year.
The options market is implying about a 2.75% stock move in either direction around the upcoming earnings release. Implied volatility was at the 34th percentile as of this morning. Weekly call options have been active from the 29 through 31 strikes, and put activity has been primarily at the 27 and 29 strikes.
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.
Morgan Stanley is expected to report adjusted EPS of $1.17, vs. $1.45 in the prior-year quarter, on revenue of $10.06 billion, according to third-party consensus analyst estimates. Revenue is expected to be down 9.2% year-over-year.
The options market is implying about a 3% stock move in either direction around the coming earnings release. Implied volatility was at the 31st percentile as of this morning. Weekly put activity has been higher in the 40, 41 and 43 strikes, while call activity has been relatively light, with some activity in the 47 and 50 strikes.
Goldman Sachs is expected to report adjusted EPS of $4.96, vs. $6.95 in the prior-year quarter, on revenue of $9.07 billion, according to third-party consensus analyst estimates. Revenue is expected to be down 9.6% year-over-year.
The options market is implying about a 2.4% stock move in either direction around the coming earnings release. Implied volatility was at the 33rd percentile as of this morning.
Call activity for GS has been higher in the 205 and 210 areas, while put focus has been active primarily at the 200 strike.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.