Goldman, BofA and Morgan Stanley in Focus Next on Loans, Rates

(Bloomberg) -- Investors are watching third-quarter results from Bank of America Corp., Goldman Sachs and Morgan Stanley on Monday and Tuesday for further clues about the economy and lending.

Bank shares are slipping in early afternoon trading on Friday, with the KBW bank index falling as much as 2.7 percent, extending losses into a fourth day, to the lowest level since November 17. Results from JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. were mixed on Friday morning.

Outlook is a main question, given a tough start to the fourth quarter for U.S. equities, Bloomberg Intelligence analyst Alison Williams says. Though her views heading into next week’s earnings, and for the fourth quarter, are little changed based on results so far, she flags JPMorgan’s outperformance in equity capital markets and equities trading, which bodes well for Goldman Sachs and Morgan Stanley.

JPMorgan, Wells Fargo and PNC management teams continued to tout a strong economy with the release of their third-quarter results, but loan growth is "challenging," amid tougher competition, elevated pay-downs and falling loan utilization, SunTrust’s Jennifer Demba writes in a note. Demba adds that net interest margin expansion is slowing as deposit costs continue to increase, while the Federal Reserve’s third-quarter rate hike had minimal impact on the quarter, and mortgage banking revenues continued to weaken.

Goldman, BofA and Morgan Stanley in Focus Next on Loans, Rates

"Management comments will be key," KBW equity strategist Fred Cannon told Bloomberg via email ahead of Friday’s earnings. "Credit metrics all remain excellent and credit spreads were narrow" throughout the quarter.

The third-quarter "is an example of ancient history," as reports won’t reflect the impact of higher rates on banks’ businesses, veteran bank analyst Richard Bove told Bloomberg. Bove will be looking at metrics including accumulated other comprehensive income (AOCI) and net interest margins (NIM). He’s skeptical NIMs are getting a boost from higher rates, as banks’ actual operating environment is different from a "theoretician’s view."

Goldman, BofA and Morgan Stanley in Focus Next on Loans, Rates

Even though investors may hunger for comments about recent moves, bank leaders may not have had enough time to extrapolate yet, Mark Howard, senior multi-asset strategist at BNP Paribas, said in an interview. "A hiccup in the market is probably not going to change the outlooks," Howard says, adding that JPMorgan CEO Jamie Dimon has "seen these hiccups dozens of times. A couple of days of volatility" probably doesn’t change much.

Howard added that "letting air out of the balloon" may turn out to be good for banks, as a reset can generate activity. "A sharp 3 percent correction can be a wake-up call to action," bringing business forward as companies move more quickly with deals and in capital markets. Volatility may be lucrative for markets-oriented businesses as well.

Goldman, BofA and Morgan Stanley in Focus Next on Loans, Rates

Bank shares could use a little help these days. They peaked back in February -- lifted by tax cuts, forecasts for faster economic growth, and deregulation -- and have under-performed the broader market since May as those factors faded.

Analysts in recent weeks had hoped that banks gloomy mid-September trading updates and lighter lending expectations had set the bar low enough for a post-earnings rally.

Bernstein analyst John McDonald joined others looking for bank gains with earnings after recent underperformance. “We’re expecting solid results,” he wrote. That followed KBW saying stock prices are even lower than what tempered expectations for quarterly profits would imply, which may mean that the group is poised to rally. Earlier, Goldman said big-bank stocks were at an attractive entry point after underperforming, and as four of seven covered banks were due to beat estimates.

Investors may also have been relieved that the Democrats’ chances of capturing the Senate seem to have waned amid the controversy surrounding Supreme Court judge Brett Kavanaugh. A potential "blue wave" had spurred concerns about taxes and tighter regulation.

Others were less optimistic. On Wednesday, Portales analyst Charles Peabody cut his rating on JPMorgan to sell as the bank is likely at peak profitability, and as the stock may be overvalued, with at least 10% downside risk in the short-term. Mortgage hopes have shriveled as well, with Wedbush’s Henry Coffey noting expectations about future mortgage volumes are headed "much lower" than initially forecast by Fannie Mae, Freddie Mac and the MBA, and will likely be flat-to-down in 2019 and 2020.

BANK OF AMERICA ESTIMATES

  • Earnings release expected Monday at 6:45am
  • 3Q adj. EPS est. 62c (range 60c to 64c)
  • 3Q rev. net of interest expense est. $22.63b (range $22.38b to $22.91b)
  • 3Q total trading rev. est. $3.15b
    • Equities $1.06b
    • FICC $2.08b
  • I-banking rev. est. $1.33b
  • 3Q net interest yield est. 2.41%
  • 3Q provision for credit losses est. $969.1m
  • Call 8:30am, 877-200-4456 pw 79795
  • BI 3Q preview from October 11: Loan Growth, Rate Questions Central to BofA Earnings

GOLDMAN SACHS

  • Earnings release expected Tuesday at 7:30am
  • 3Q adj. EPS est. $5.39 (range $4.95 to $6.23)
  • 3Q net revenue est. $8.36b (range $7.72b to $8.79b)
  • 3Q total trading revenue est. $3.12b
    • Equities $1.73b
    • FICC $1.45b
  • I-banking rev. est. $1.75b
  • Call 9:30am, 888-281-7154
  • BI 3Q Preview from October 11: Market Moves Central to Outlook as Goldman Reports

MORGAN STANLEY

  • Earnings release expected Tuesday at 7am
  • 3Q EPS est. $1.01 (range 96c to $1.14)
  • 3Q net rev. est. $9.56b (range $9.27b to $9.91b)
  • 3Q total trading rev. est. $1.98b
    • Equities $1.98b
    • FICC $1.17b
  • I-banking rev. est. $1.29b
  • Call 8:30am, 877-895-9527 pw 6395985

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