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Earnings: Will BAC and WFC Buck the Banking Beat?

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April 13, 2016
bac earnings release

Bank of America (BAC) and Wells Fargo (WFC) dive into the earnings pool Thursday before the market’s open to let investors know how the Q1 has been for the beleaguered banking sector. Will there be any redeeming news?

The odds aren’t great, unless one or both of them happen to beat earnings expectations. Many Wall Street analysts say they’re not expecting a whole lot of good news from the quarter that just ended, but are hoping the best for the quarter that we're in.

Remember, the banking sector has been hammered by a pack of economic woes that appear to have less to do with their internal business practices and more to do with the outside forces that impact their day-to-day operations. Low interest rates hurt bank margins, a vigorous regulatory arena constrains operations, and the crumpled energy industry pressures loans. And let’s not forget about China’s slowing economic growth and that impact on major banks everywhere.

In short: Banks didn’t have a whole lot going for them in Q1, most analysts admit. As we noted yesterday, the banking sector overall is on track to skid 9.2%, according to Thomson Reuters’s data, to take the No. 1 spot among losers of all the 10 components of the S&P 500 index.

Is Bad News Good News?

Could the bad news already be baked into the price of the stock? BAC bottomed in February at a three-year trench and has enjoyed a healthy 18% jump since. WFC stock hit a two-year trough in early February and has recovered 6% of that and has finished higher so far this week. 

Here’s what analysts reporting to Thomson Reuters are looking for from BAC: adjusted earnings of $0.20 a share on revenue of $20.3 billion for the quarter. That’s down from $0.27 a share in the year-ago quarter on revenue of $21.4 billion.

For WFC, the results look relatively cheerier, according to analysts who expect WFC to be the best among the big banks. Revenues are expected to come in at $21.6 billion with a profit per share of $0.98. A year ago, revenues were $21.3 billion and the profit was $1.04 a share, which beat analyst forecasts by $0.06.

What lies ahead is of particular interest for analysts who will be listening to what the people in the trenches think about when interest rates might rise and what that could mean for their investments.

Listen to Sentiment

For BAC, short-term options traders have priced in a potential 4.5% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform from TD Ameritrade.

Going into earnings the 13-strike puts were active on Tuesday as were the 13½- and 13-strike calls. Implied volatility is at the 43rd percentile—the middle of the range, and higher than we’ve seen in other bank stocks so far.

WFC reflects more of what we’ve already seen, with short-term options traders pricing in a potential 2.3% move in either direction around the earnings release, according to the Market Maker Move.

Going into earnings, the 47-strike put lines are active as were the 48-strike call lines. The implied volatility is at the 23½ percentile. (Please remember past performance is no guarantee of future results.)

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. 

bac earnings

FIGURE 1: BIG BOUNCE FOR BAC

Shares touched a three-year trough but have surged and are holding on ahead of earnings. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

wfc earnings

FIGURE 2: WFC PICKS UP MOMENTUM

Like many of its banking brethren, WFC shares bottomed in February and are moving higher ahead of earnings. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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