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Earnings: Another Financial Roundup With BAC, GS, and MS

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April 17, 2017
Financial Trading Desks
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Following strong results from JPMorgan Chase (JPM) and Citigroup (C) that beat expectations last week, some analysts are more optimistic heading into this week’s major financial earnings. Bank of America (BAC) and Goldman Sachs (GS) report before open on Tuesday, and Morgan Stanley (MS) reports before market open on Wednesday.

JPM topped many analysts’ expectations and reported earnings-per share, or EPS, of $1.54 on revenue of $25.59 billion. Trading revenue and average core loan growth at the bank was higher than most analysts expected. C also beat analysts’ estimates and reported EPS of $1.27 on revenue of $18.12 billion. Its fixed income trading revenue climbed 19% from the same quarter last year and equity trading revenue increased 10%. 

Following JPM and C’s positive Q1 results, some analysts think GS, MS and BAC’s trading revenues could top expectations as well. Fixed income, currency and commodity (FICC) and equity trading makes up about 40% of GS and MS, while trading is just over 14% of BAC’s business.

Another area analysts have focused on is the future direction of interest rates and how that could impact lenders. With interest rates close to historic lows, there is an expectation interest rates will continue to rise in the future—by how much or when is the big unknown. Some analysts think if consumers are worried interest rates are going to rise quickly, they could decide to make larger purchases sooner to lock in current interest rates, potentially speeding up loan growth at certain banks.

Many sectors rallied since the November elections on expectations of tax reform, deregulation, and rising interest rates—including the financial sector. Lately though, “Stocks are waffling and are likely to remain wobbly until earnings as people refrain from taking positions,” said Karyn Cavanaugh, senior market strategist at Voya Financial, in a recent International Business Times article.  

Bank of America (BAC) Earnings

BAC has a large lending business and many analysts expect it to benefit if interest rates continue to rise. Last quarter, BAC’s net interest income—the difference between revenue the bank generates from assets and the expenses associated with paying its liabilities—increased 6% to $10.3 billion. In the company’s Q4 earnings press release, CFO Paul Donofrio said “while the recent rise in interest rates came too late in to impact fourth-quarter results, we expect to see a significant increase in net interest income in the first quarter of 2017”.       

BAC is expected to report earnings-per-share, or EPS, of $0.35 on revenue of $21.54 billion, according to consensus third-party analyst estimates. Higher net interest income, loan book growth, and expansion in its wealth management business are expected contributors to the expected 25% year-over-year increase in Q1 earnings. The bank has beat earnings expectations in the last three quarters.

BAC recently hit a 52-week high of $25.80 on March 2, but has declined a little over 13% since. Options traders have priced in a potential 1.8% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. At the monthly April 21 expiration, short-term options trading in calls has been active at the 23 and 23.5 strike prices while puts have been active at the 22.5 and 23 strikes. The implied volatility sits at the 30th percentile.

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.

Average 30 year fixed rate mortgage rates shown on the thinkorswim platform by TD Ameritrade

FIGURE 1: RISING MORTGAGE RATES.

Mortgage rates are starting to rise and some analysts think BAC could potentially benefit if the trend continues. 30-year fixed rate mortgage averages in the United States since late 2008, shown on the thinkorswim® platform by TD Ameritrade. Source: Federal Reserve's FRED database. For illustrative purposes only. Past performance does not guarantee future results.

Goldman Sachs (GS) Earnings

Following stronger-than-expected equity trading results from JPM and FICC trading results from C, some analysts have been more optimistic about upcoming GS earnings. CFRA analyst Ken Leon said “following strong results in investment banking and trading by JP Morgan, we believe GS will deliver comparable strength. GS has the highest revenue concentration to the capital markets vs. peers.” GS is expected to report earnings-per-share, or EPS, of $5.38 on revenue of $8.37 billion, just over double the $2.68 EPS reported in Q1 2016, according to consensus third-party analyst estimates.

GS also hit a 52-week high of $255.15 at the beginning of March, but has since retreated and the stock closed at $223.32 on Thursday (markets were closed on Friday). Options traders have priced in a potential 1.5% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. In short-term options activity leading up to earnings, calls have been active at the 230 strike price while puts have been active at the 225 and 230 strikes, both at the monthly April 21 expiration. The implied volatility sits at the 36th percentile.

GS and MS Company Profiles on the thinkorswim platform by TD Ameritrade

FIGURE 2: GS AND MS COMPANY PROFILE.

Wealth management is the largest division for MS (right chart), while FICC trading is the largest for GS (left chart). The Company Profile on the Fundamentals tab on the thinkorswim® platform allows TD Ameritrade clients to analyze potential revenue drivers of a stock. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Morgan Stanley (MS) Earnings

Comparable to GS, equity and FICC trading makes up a large portion of MS revenue and some analysts have expressed optimism trading revenues this quarter will beat expectations based on C and JPM’s results. Management cited strong sales and trading results, strength in M&A advisory, and positive results in its wealth management business as contributors to its earnings beat last quarter. The wealth management giant has beat top and bottom-line expectations in the past several quarters and is expected to report Q1 EPS of $0.90 on revenue of $9.1 billion, according to consensus third-party analyst estimates. MS reported EPS of $0.55 on revenue of $7.79 billion in the same quarter last year.

Following the same pattern as many other financials, MS hit a 52-week high of $47.33 early in March and the stock closed just above $40 at the end of last week. Short-term options traders have priced in a potential 1.6% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. At the April monthly expiration leading up to earnings, calls have been active at the 41.5 and 42 strike prices while puts have seen activity at the 40 and 45 strikes. The implied volatility sits at the 45th percentile.

Chart comparing MS and GS YTD stock performance, shown on the thinkorswim platform by TD Ameritrade

FIGURE 3: MS COMPARED TO GS.

MS and GS (purple line) have both declined since hitting 52-week highs in early March. 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.

It’s a busy earnings week with Dow components Johnson & Johnson (JNJ) and International Business Machines (IBM) reporting earnings before market open tomorrow, and General Electric (GE) later in the week. For more earnings coverage, check out my preview of what might be expected when Netflix (NFLX) reports after the bell today.

Good Trading,
JJ
@TDAJJKinahan