Q1 earnings season is kicking off this week with JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C) set to report before the open on Friday, Apr. 13.
On a broader level, business conditions have been good for many of the banks. Economic growth in the U.S. and abroad has accelerated in recent quarters, U.S. tax reform was passed, interest rates have ticked higher, and Congress and regulators continue to work on deregulating aspects of the financial industry.
At the same time, there have been growing concerns among investors and analysts that an escalation in the U.S. and China’s back and forth on tariffs could dampen some of the tailwinds the sector has enjoyed, but there’s a lot of uncertainty around how things are going to play out. Consider listening in on earnings calls to see what CEOs have to say about the tariffs and how that might affect their businesses going forward.
This uncertainty has been one of the factors that has contributed to volatility returning to normalized levels in the Q1 2018 after a quiet 2017, and appears to be helping to boost trading revenues at the major banks. Several banks, including JPM and C, have said they expect Q1 trading revenues to be up mid- to high-single digits compared to last year. Throughout 2017, many banks were consistently reporting year-over-year declines, which had pressured results in previous quarters.
JP Morgan Earnings and Options Trading Activity
CEO Jamie Dimon’s annual letter to shareholders was published recently and one of the things he said was “it would be a reasonable expectation that with normal growth and inflation approaching 2%, the 10-year bond could or should be trading around 4%.” Several analysts came out and said that’s far-fetched given the Fed’s rate hike projections and considering the 10-year was recently trading at 2.79%, but it could be something he gets a few questions about on tomorrow’s call.
When JPM reports, it is expected to report adjusted EPS of $2.28, up from $1.54 in the prior-year quarter, on revenue of $27.5 billion, according to third-party consensus estimates. Between tax reform and other factors, estimates are high for JPM. When the company last reported, analysts were expecting $1.69 per share, the highest estimate over the past 8 quarters.
Around JPM’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 was at the 72nd percentile.
In short-term options trading at the next few expirations, activity has been heavier on the call side with activity concentrated at the 115 and 116 strike prices. On the put side, trading has been concentrated at the 110 strike.
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.
Wells Fargo Earnings and Options Trading Activity
WFC is expected to report adjusted EPS of $1.07, up from $1.00 in the prior-year quarter, on revenue of $21.7 billion according to third-party consensus estimates. This is the lowest revenue estimate for WFC since Q1 2016, and analysts have indicated they expect revenue to decline slightly on a sequential basis from $22 billion in Q4 2017.
The company is coming off of a tougher Q4 report where it had incurred a $3.25 billion pre-tax expense charge as a result of litigation accruals stemming from some of its sales practice. The Fed also dealt a blow to the company in early February by restricting WFC’s asset growth until it improves governance and controls. Shares dropped sharply following that announcement. Over the past few weeks, the stock has been trading in a tighter range in the low-$50s.
Around WFC’s upcoming earnings release, options traders have priced in about a 2.5% potential stock move in either direction, according to the Market Maker Move indicator. As of this morning, implied volatility was at the 78th percentile.
Short-term options trading leading up to WFC’s report has been heavier on the put side. At the Apr. 13 expiration, trading has been concentrated at the 51-strike put and 52.5-strike put. At the Apr. 20 monthly expiration, volume was heaviest at the 50-strike put during yesterday’s trading session.
Citigroup Earnings and Options Trading Activity
C is expected to report adjusted EPS of $1.62, up from $1.27 compared to last year, on revenue of $18.9 billion according to third-party consensus estimates. Expectations are also elevated for C this quarter; analysts were expecting adjusted EPS of $1.19 for Q4 2017 when the company last reported and revenue estimates are the highest they’ve been over the past eight quarters.
At the end of January, the stock peaked at a new all-time high of $80.70. The stock pulled off that high and bounced off the $66.50 range at the start of April, where it has seen some support, and has been trading around $70 heading into tomorrow’s report.
Around C’s upcoming earnings release, options traders have priced in about a 2.3% potential stock move in either direction, according to the Market Maker Move indicator. As of this morning, implied volatility was at the 67th percentile.
In short-term trading at the Apr. 13 expiration, calls have been active at the 70 and 71 strike prices, while puts have been active at the 68.5 and 70 strikes. At the Apr. 20 monthly expiration, trading has been heaviest at the 70-strike call, with volume of 8,316 contracts during yesterday’s session.
What’s Coming Up
The next round of big bank earnings comes out early next week:
- Bank of America (BAC) is scheduled before the open Monday, Apr. 16
- Goldman Sachs (GS) is scheduled before the open Tuesday, Apr. 17
- Morgan Stanley (MS) is scheduled before the open Wednesday, Apr. 18
Other notable names reporting next week include Netflix (NFLX), Johnson & Johnson (JNJ), IBM (IBM), General Electric (GE) and Procter & Gamble (PG). If you have time, make sure to check out today’s market update to see what else is happening.