Off The Wire
U.S. banks need more than in-line third quarter to boost shares
(Reuters) - Major U.S. banks, beginning on Friday, are expected to report earnings growth that exceeds that of the broader market, but that may not be enough to impress investors, who have been unimpressed by loan growth and are anticipating higher deposit rates and credit costs.
Investors skepticism has been significant in 2018. The S&P 500 Banks Index .SPXBK has fallen 3.7 percent year to date compared with a 3.6 percent increase for the S&P 500 .SPX even after a market tumble on Wednesday.
Still, Wall Street expects S&P 500 banks to report third-quarter earnings growth of 26.5 percent compared with a 21.4 percent for the broader S&P 500, according to I/B/E/S data from Refinitiv.
“It’s going to be an OK quarter. Capital markets activity will be a little disappointing, “ said Sandler O’Neill analyst Jeffery Harte, referring to trading results.
Even if earnings reports meet expectations, bank stock weakness may continue as analysts struggle to find the next positive catalyst but can easily identify risks such as rising deposit costs and a deterioration in credit quality.
“I don’t think if the results are in line that it really gets us moving in the right direction ... you continue to have late cycle concerns weighing on the stocks,” said Michael Cronin, investment manager at Aberdeen Standard Investments in Boston.
One issue is how much bank costs will rise as banks feel pressure to raise interest rates paid on customer deposits since the U.S. Federal Reserve has already raised overnight rates eight times since late 2015 and has settled into a quarterly tightening cycle.
On top of this, credit costs are so low that analysts worry they will increase if the economy deteriorates because “they can’t get much better from where they are right now,” according to Cronin.
Many investors had started out the year with high hopes for bank stocks as they had expected the Trump administration’s slashing of corporate taxes to boost loan growth with the broader economy. But 10 months after the tax cut, this has yet to happen and investors seem to be losing hope.
“I’m starting to think it’s not going to accelerate from here,” said Sandler O’Neill’s Harte, adding that “it seems investors have adopted more of a ‘show me’ attitude in the face of recent trends.”
Those trends include concerns about macroeconomic growth and the trade war between the United States and China.
“You’ve talks about tariffs and trade wars which continue to weigh on sentiment and can really impact companies decisions about whether to invest in longer term projects,” said Aberdeen Standard’s Cronin.
Investor concerns about loan growth are big enough they appear to be offsetting any boost from a recent spike in U.S. Treasury yields. Bank shares often rise on a steepening yield curve - when the gap between short and long dated bonds widens - as a steeper yield curve raise banks net interest income.
But banks have already erased any gains they made last week in response to a sharp increase in Treasury yields as investors are looking at the longer term.
“What’s going to get incrementally better in the next year or two for bank earnings growth to accelerate?” said Sandler O’Neill’s Harte. “That’s what the market is wrestling with, not such much that there’s a downturn looming but what’s going to drive another incremental leg up in earnings growth.”
Reporting By Sinéad Carew; Additional reporting by Jonathan Spicer; Editing by Steve Orlofsky