This week brings another round of fourth-quarter results from several of the biggest banks. Bank of America (BAC) and Goldman Sachs (GS) both report before market open on Wednesday, Jan. 17 and Morgan Stanley (MS) is scheduled to report before market open on Thursday, Jan. 18.
One challenge that all of the big banks have faced in recent quarters is weaker trading revenues as a result of lower volatility. To add to the challenge, banks are facing tougher comparisons to last year, which saw a few more market-moving events between Brexit and the 2016 U.S. Presidential elections in the fourth quarter.
Despite weaker trading revenues, many analysts overall have been pretty optimistic about the sector between the recent passage of tax reform, continued economic growth across major global economies and the Fed continuing to raise the fed funds rate, although there have been some concerns about the flattening yield curve.
Overall, analysts have indicated that they are optimistic about the longer-term impact of a lower corporate income tax rate for the financial sector, but one thing to note is that companies have indicated they expect large one-time charges in the fourth quarter as a result of foreign earnings facing taxation and write-downs on deferred tax assets. BAC indicated it expects a $3 billion charge, MS said it faces a $1.25 billion charge, and GS said it’s facing about a $5 billion impact.
Bank of America Earnings and Options Trading Activity
When BAC releases Q4 results, it is expected to report adjusted earnings per share (EPS) of $0.44 per share, up from $0.40 in the prior-year quarter, on revenue of $21.28 billion, according to third-party consensus analyst estimates.
Like the other larger banks, BAC is expected by many analysts to face a slowdown in trading revenue as market volatility remained subdued in the quarter. In early December, CEO Brian Moynihan stated revenue in its trading business was down about 15% year over year so far in Q4, in line with the company’s Q3 results.
When it last reported, growth in the company’s consumer banking, global wealth and investment, and global banking divisions offset the decline in sales and trading revenue in its global markets’ division, something analysts are widely expecting again for this quarter.
The stock has had quite the run since September, starting the month in the mid-$23 range. Shares have since moved higher and closed above $31 for the first time since 2007. Around BAC’s upcoming earnings release, options traders have priced in about a 2% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility is at the 31st percentile.
In short-term trading at the January monthly expiration, calls have been active at the 30 and 31 strike prices, with the highest open interest at the 30 strike. On the put side, the 30 strike has seen the highest activity—volume was 42,075 contracts during Friday’s session.
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.
Goldman Sachs Earnings and Options Trading Activity
For Q4, GS is expected to report adjusted EPS of $4.90, down from $5.08 in the prior-year quarter, on revenue of $7.63 billion, according to third-party consensus analyst estimates.
In the third quarter of 2017, GS reported a 26% year over year drop in revenue from fixed income, currency and commodity trading as a result of low volatility and low client activity. In the same quarter, the company reported double-digit revenue growth in its investment banking as well as its investing and lending division, offsetting the declines in trading revenue.
The stock lagged the broader financial sector in 2017 and closed out the year with a 5.46% return, although it did hit a new all-time high of $262.14 on December 18. Since then, shares have pulled back slightly to $257.03 as of Friday’s close. Around GS’ upcoming earnings release, options trader have priced in about a 2.6% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility is at the 48th percentile.
In short-term trading at the January monthly expiration, call and put activity has been a little all over the place. On the call side, the 250 and 260 strikes have been the most active, and on the put side, the 255 and 260 strikes have seen the most activity.
Morgan Stanley Earnings and Options Trading Activity
Rounding out the banks, MS is expected to report adjusted EPS of $0.77, up from $0.74 in the prior-year quarter, on revenue of $9.13 billion, according to third-party consensus analyst estimates.
In the third quarter, MS reported $2.9 billion in sales and trading revenue in its institutional securities division, down from $3.2 billion compared to last year. Investment banking revenue increased to $1.3 billion, from $1.1 billion in the prior-year period. In recent quarters, the company has reported growth in its wealth management business that has helped offset declines in trading revenues.
With a closing price of $55.12 on Friday, options traders have priced in about a 2.5% potential stock move in either direction around MS’ upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility is at the 21st percentile.
In short-term trading at the January monthly expiration, activity on both the call and the put side has been concentrated around the at-the-money 55 strike, although volume has been quite a bit higher on the call side. During Friday’s session, 6,702 contracts traded at the 55-strike call, compared to 1,734 at the 55-strike put.
As earnings season continues, the pace of results picks up in the coming weeks. Next week, Netflix (NFLX) reports after market close on Monday, Jan. 22. Before market open on Tuesday, Jan. 23, Johnson & Johnson (JNJ), Procter & Gamble (PG) and Verizon (VZ) open their books. General Electric (GE), Caterpillar (CAT), Ford (F) and Intel (INTC) are also scheduled to report later in the week.
In terms of economic data, this week is a busier one. The Fed releases its Beige Book Wednesday afternoon, and Thursday brings December housing starts and building permits. On Friday, we’ll see how consumers are feeling with preliminary consumer sentiment. If you have time, make sure to check out today’s Market Update to see what else is going on.