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Earnings: Was Brexit Actually a Benefit to Big Banks?

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July 15, 2016
Bank market trading activity and earnings reports.

Bank of America (BAC), Morgan Stanley (MS) and Goldman Sachs (GS) are scheduled to report earnings early next week. Rival JPMorgan (JPM) reported earlier and beat expectations, but still reported results that were lower than the year-ago period.

JPM noted, however, the U.S. economy was improving as businesses and consumers turn to borrowing again. What’s more, Brexit, Britain’s vote to leave the European Union, gave a boost to trading activity. Can other banks see these unexpected advantages?

Earnings Forecast to Fall at BAC                                                                                                    

BAC, which reports Monday ahead of the bell, has seen its expectations downgraded throughout the quarter. Analysts reporting to Thomson Reuters are looking for per-share earnings of $0.33, 27% below last year’s $0.45 a share. Revenues are slated at $20.7 billion.

Analysts note the year-ago period was a blockbuster for BAC that probably cannot be repeated in this quarter, which they say explains the expectations for double-digit drop in earnings. But if business and consumer lending, plus trading around Brexit worked for JPM, can it work for BAC, which saw last year’s results benefit from those divisions?

Short-term options traders have priced in a potential 2% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform by TD Ameritrade.

Ahead of earnings, there was a lot of activity around the 13.5- and the 14-strike lines in puts and calls. The implied volatility is at the 31st 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.

FIGURE 1: BAC SLOWLY RECOVERING AFTER BREXIT.

Like its rivals, BAC sold off after the Brexit vote, but remains below where it was trading the day before the vote. 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.

MS Bounces Back Post-Brexit

Like BAC, the question is has MS also benefited from increased trading volumes around Brexit and a better loan business? MS, considered among the leaders in wealth management, has recently opened offices in Miami to support its growing Latin American business. Has MS benefited from political instability in Latin America with investors seeking relative safety in U.S. investments?

If so, it’s not likely to be able to undo a lot, analysts say. We’ll see when results come out ahead of the bell Wednesday. Analysts are forecasting a 23.7% drop in per-share profit compared with last year’s results, while revenue could drop as much as 12.7% to $8.34 billion. In the last eight quarters, MS has managed to surprise six times.

Short-term options traders have priced in a potential 1.75% share price move in either direction around the earnings release, according to the Market Maker Move indicator.

There’s been activity in the at-the-money puts and calls at the 28-strike line. The implied volatility is at the 28th percentile.

FIGURE 2: BIG RECOVERY FROM BREXIT LOWS.

MS shares sold off after Brexit, but are up some 20% since late June. 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.

GS Rebounds from 52-week Low

And what about GS? Has the more active trading environment been a bonus for GS too? Given GS’s pure-play investment-bank status, the consensus is probably not because GS is more exposed to market volatility than traditional banks. And there’s been plenty of that this year, notwithstanding the fresh market highs in recent sessions.

Initial public offerings have long been a high revenue generator for GS, but this year’s been a slow one for IPOs, even after considering a recent pick-up in the IPO business during the second quarter. We’ll see how that may or may not have hurt GS when it opens its books Tuesday before the market bell.

Given all that, short-term options traders have priced in a potential share price move of just under 2% in either direction around the earnings release, according to the Market Maker Move indicator.

Options trading has seen activity at the 155-strike puts and the 165-strike calls. GS’s implied volatility is at the 26th percentile.

FIGURE 3: BREXIT BOTTOM?

GS sank to a 52-week low after Brexit, but bounced back and has since performed relatively well. 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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