As third quarter earnings season gets going, the first round of major banks report on Thursday and Friday this week. JPMorgan Chase (JPM) and Citigroup (C) report earnings before market open on Thursday, October 12. Bank of America (BAC) and Wells Fargo (WFC) report earnings before market open on Friday, October 13.
Financial stocks have had quite a rally since early September. Some of the catalysts that appeared to have pushed shares higher were the increasing likelihood of a Fed rate hike in December, further details regarding the Fed’s plans to start reducing its $4.5 trillion balance sheet that ballooned in the wake of the financial crisis and the release of President Trump’s framework for proposed tax reform. There was some optimism that the Fed’s actions appear to be driven by sustained economic growth and not an attempt to rearm themselves to prepare for the next economic downturn.
Later today, the Federal Open Market Committee (FOMC) will release the minutes from its September meeting and there’s also a string of Fed governors speaking. With the minutes and plenty of Fed governors to listen, there could be some additional clarity around the Fed’s thinking and plans.
The probability for a Fed rate hike in December has increased over the past several weeks, with CME’s FedWatch Tool putting the odds at a 91.7% chance the federal funds rate will be raised a quarter of a percentage to a target range of 1.25% to 1.50%. Despite a recent rise in U.S. Treasury yields, the spread between short and long-term interest rates remains pretty flat. If the spread between long-term and short-term interest rates continues to shrink it could pressure earnings in the sector because banks tend to borrow in the short-term and lend to consumers and businesses over longer periods of time (mortgages, long-term company debt, etc.)
Speaking of the Fed, earlier this year many of the banks announced dividend hikes and share repurchases following the Fed’s approval of the banks’ annual stress tests that are designed to test the banks’ ability to withstand another financial crisis. CFRA analysts are expecting payout ratios above 80% for the six largest diversified and investment banks in the second half of 2017. The significant share repurchases have been widely cited as one factor that is increasing bank earnings.
One factor that has negatively impacted the major banks across the board in recent quarters has been a decline in revenue generated from fixed income, currencies and commodities trading. CEOs warned in the past of declines in trading revenue and several have recently reiterated those warnings, again citing low volatility. Earlier in September, JPM’s CEO Jamie Dimon said its third-quarter trading revenue will decrease about 20% year-over-year and C’s CEO John Gerspach said it could drop about 15%.
Below we’ll take a look at what might be expected for the banks’ upcoming earning as well as recent options trading activity in the stocks.
JPMorgan Chase Earnings and Options Trading Activity
If you’re interested in learning more about what’s going on in the global economy, consider listening to JPM’s earnings conference call. Due to the size and scope of its business throughout the world, CEO Jamie Dimon often discusses macroeconomic factors impacting markets.
Two areas analysts are likely to focus on are the company’s lending and investment banking divisions. For the rest of 2017, CFRA analysts expect high single-digit growth in consumer and commercial loans, while mortgage loans are expected to decline as a result of the bank being more conservative with higher lending standards. In the second quarter, JPM’s investment bank revenue increased 14% year-over-year, largely attributed to strength in its underwriting and treasury services.
For the third quarter, JPM is expected to report earnings of $1.67 per share, up from $1.58 in the prior-year quarter, on revenue of $25.7 billion, according to third-party consensus analyst estimates. Revenue is expected to increase slightly from the $25.5 billion generated in the third quarter of 2016.
Options traders have priced in about a 1.6% potential stock move in either direction around JPM’s upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the October 13 weekly expiration, calls have been active at the 97.5 and 100 strikes, while puts have been active at the 95 and 95.5 strikes. As of this morning, implied volatility is at the 27th 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.
Citigroup Earnings and Options Trading Activity
C has outperformed the broader financial sector so far this year and is up 24.08% year-to-date. Citi Holdings has been one part of the company that has dampened revenue growth. If Citi Holdings is excluded, CFRA analysts project 6% year-over-year revenue growth compared to 2% growth with that division included.
For the third quarter, C is expected to report earnings of $1.30 per share, up from $1.24 in the prior-year quarter, on revenue of $17.85 billion, according to third-party consensus analyst estimates. Revenue is expected to increase slightly from the $17.76 billion the company reported in the same period last year.
Around C’s upcoming earnings release, options traders have also priced in about a 1.6% potential stock move in either direction according to the Market Maker Move indicator. In short-term trading at the October 13 weekly expiration, calls have been active at the 75 and 75.5 strike prices, while puts have seen a smattering activity across strike prices from the 75 strike down to the 70 strike. As of this morning, the implied volatility is at the 18th percentile.
Bank of America Earnings and Options Trading Activity
Like the rest of the banks, BAC was negatively impacted by a decline in trading revenue in the second quarter. A large portion of BAC’s revenue is generated from its consumer and commercial banking divisions. In its most recent interest rate sensitivity analysis, BAC expects it would generate anywhere from $1 to $3.2 billion in additional net interest income if interest rates rise by 100 basis points. The variance in that range depends on rates rising in the short-term, the long-term, or both.
BAC is expected to report earnings of $0.46 per share, up from $0.41 in the prior-year quarter, on revenue of $22.07 billion, according to third-party consensus analyst estimates. Revenue is expected to increase about 1% year-over year from $21.86 billion reported in the third quarter of 2016.
Options traders have priced in about a 1.8% potential stock move in either direction around BAC’s upcoming earnings release, according to the Market Maker Move indicator. In short-term trading at the October 13 weekly expiration, calls have been active at the 26 strike price and puts have been active at the 25 and 25.5 strikes. As of this morning, implied volatility is at the 27th percentile.
Wells Fargo Earnings and Options Trading Activity
WFC continues to deal with the fallout from its sales scandal in 2016 as the company recently announced there were more unauthorized accounts opened than they initially estimated. CEO Tim Sloan testified before the Senate Banking Committee, which writes rules for the banking industry, at the start of October. WFC shares have lagged the overall financial sector as it has worked to resolve the problems over the past year.
The company’s lending division, specifically mortgages since it is a large portion of the bank’s business, is likely to be a focus for analysts. In the second quarter of 2017, WFC’s average loans outstanding declined 1% in the second quarter this year, while the average loan yield increased 20 basis points to 4.36%. Positive growth in the company’s commercial loans appeared to have helped offset the decline in consumer loans.
For the third quarter, WFC is expected to report earnings of $1.04 per share, a cent higher than the $1.03 earned in the prior-year quarter, on revenue of $22.3 billion, according to third-party consensus analyst estimates. Revenue is expected to be roughly flat to last year.
Options traders have priced in about a 1.8% potential stock move in either direction around WFC’s earnings report on Friday. In short-term trading at the October 13 weekly expiration, calls have been active at the 55.5 strike price and puts have been active at the 54 strike. As of this morning, the implied volatility is at the 45th percentile.
Along with earnings, several important economic reports come out at the end of this week: the producer price index for September comes out on Thursday morning, and the consumer price index and retail sales for September come out on Friday morning. At the beginning of next week, Goldman Sachs (GS) and Morgan Stanley (MS) will open their books before market open on Tuesday, October 17. If you have time, make sure to check out today’s market update to see what else is happening.
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