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Earnings: JPM, WFC and C Turn in First Bank Results

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July 13, 2016
Stock market analysts and traders await bank revenue reports.

Amid all the hoopla surrounding fresh all-time highs in the Dow Jones Industrials and the S&P 500 comes earnings from some of the biggest banks. When the banks open their books this week, investors might get a glimpse of the dark side of historically low interest rates.

At the same time, analysts and investors are eager to hear forward-looking statements from chief executives about next quarter and beyond. In a world where Brexit, the U.K.’s vote to leave the European Union, is expected to impact the global economy, CEOs are expected to give some kind of overview on what they’re thinking might lie ahead.

What’s more, many banks have been dealing with failing loans to U.S. oil and gas exploration companies at a time when U.S. Treasury yields are also squeezing net interest margin. The results aren’t expected to be good, some analysts say, though earnings are likely to differ from bank to bank.

Ahead of the Curve with JPMorgan

First is the biggest bank by revenues, JPMorgan Chase (JPM), which reports ahead of the bell Thursday. Nearly 50% of JPM’s revenues are derived from credit-card services and investing and trading services. These are two business lines that have been hit hard in recent quarters. About 76% of JPM’s revenues are domestic, according to S&P Global Market Intelligence.

Many analysts surveyed by Thomson Reuters expect to see a second straight quarter of declines in both profit and revenue. Earnings are forecast to slip 7% to $1.43 from $1.54 a year ago. Revenue is projected at $24.1 billion from $24.5 billion a year ago. JPM has weathered these storms fairly well by outpacing expectations in the last five quarters. Can that be done again?

Short-term options traders have priced in a potential 2.1% 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, options traders were active in calls at the 65-strike while puts were seeing activity at the 62.5 strike. The implied volatility is at the 20th 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: POST-BREXIT REBOUND.

JPM sold off after the Brexit news, but has since bounced back and recovered those losses. 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.

Banking on Loans at Wells Fargo

Low interest rates are expected to be a big drag on profits and sales at Wells Fargo, though it has looked to step up lending to offset the rate headwinds. Investors want to know if it worked as well in Q2 as it did in Q1, when loans grew by 7%. Brexit shouldn’t be as much of a problem for WFC, some analysts say, considering nearly all of its revenue is generated on this side of the pond.

Many analysts anticipate that earnings-per-share will come in at $1.02, about 2% lower than the year-ago period. Revenues are expected to be a bit higher, at $22.2 billion compared with last year’s $21.3 billion.

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.

WFC’s shares have enjoyed a rebound since June’s dip and options traders were active at the 45-strike put line and the 50-strike calls. Implied volatility is at the 21st percentile. 

FIGURE 2: BOUNCE BACK TO MIDPOINT OF RANGE.

WFC rebounded from its recent lows to return to the midpoint of its 3-month trading range near $48. 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.

Citi’s Brexit Headache

Here’s where Brexit may have hurt a U.S. bank. Citi (C) generates 43% of its business in the U.S. While it has done fairly well in recent quarters, compared with its rivals, it has appeared to have done so on the back of international growth. Can that happen in a post-Brexit world?

Analysts are expecting revenues to drop by 7% to $17.7 billion from $19.2 billion. C’s per-share profit is anticipated to slide nearly 25% to $1.14 a share from $1.51 a year ago.

Given all that, short-term options traders have priced in a potential 3% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform by TD Ameritrade.

Options trading has been in a tight range with puts at the 42.5-strike line and calls at the 45-strike seeing some activity. C’s implied volatility is at the 31st percentile.

FIGURE 3: BREXIT BATTLE AND BOUNCE.

Like its rivals, Citigroup has seen its shares rebound since the June selloff. 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.