NEW YORK (Reuters) – It is estimated that most US banks start the earning season on a sharp note next week due to falling interest rates, net interest allowances could be put under pressure enough to earn the sector's first year earnings a year causing a decline in three years.
While strength in mortgage banking and cheap valuations could provide support to S&P 500's bank index, its performance depends on what assurance executives provide on credit conditions, the prospect of lending growth and their ability to reduce deposit costs during their conference call.
Tuesday gives third quarter profit reports from Citigroup Inc, Wells Fargo and Co., JPMorgan Chase & Co., and Goldman Sachs. Bank of America reports on Wednesday.
The largest banks of the United States will report a fall of 1.2% in third quarter earnings, with revenue rising by 0.9%, according to data aggregated by Refinitiv, analyst David Aurelio. This is the first profit reduction from the same quarter in 2016, according to data from Factset.
“Overall, it is a challenging quarter due to the net interest rate environment,” said Fred Cannon, Keefe's research director Bruyette & Woods in New York, and stated that the US Exchequer was half-yearly and inverted 2 years. / Curve yield 10 years during the quarter.
Bank profits depend heavily on net interest income, or the difference between the rate they charge for long-term loans and the rate they pay for short-term loans.
Executives from Citi, Wells Fargo and JPMorgan cut their full year forecasts for net interest income last month, and cited macroeconomic concerns.
Part of the problem is Federal Reserve US interest rate cuts. in July and September. And future traders are betting on more future feed rate cuts, one in October included.
As a result, bank investors will be listening for an executive declaration regarding the perception of interest margins and their ability to mitigate weakness, said Lisa Welch, Manulife Investment Management, who manages John Hancock's Regional Bank Fund.
Offsetting of borrowed profits would be lower than a reduction in interest rates paid by banks from deposits, as these rates rose and subsistence interest rates at subsistence.
“There will be many questions about how quickly banks are able to lower their deposit costs as loan results come down,” said Welch, adding that she is not expecting deposit costs “fall down so much”. fast and the loan results have fallen. ”
Mortgages may be another cash lining with lower rates in the number of third quarters and in the future quarter as borrowers benefit from cheaper rates. Refinancing, representing most mortgage applications, has more than doubled from a year ago, according to details of the Bankers' Association Association which was issued on Wednesday.
“With lower rates, we expect a very strong mortgage activity,” said Welch, focusing on First Horizon as one bank that could benefit from a mortgage claim.
The American Bank and Wells Fargo should also benefit, according to Cannon KBW. To deal with the growing demand, Wells Fargo is taking his mortgage team, according to memorabilia that Reuters saw this week.
But the investors will also be alert to signs that delay US economic growth and is applying for debt repayments, said Mike Cronin, investment manager at Aberdeen Standard Investments.
“Since we had a little weaker economic data, is there any trend in credit costs that raises concerns by 2020?” Cronin said.
To date, the sector neutral Cannon has provided strong credit and credit balance sheets. “But if we start looking at a significant decline in credit our minds would change how we think of the banks,” he said.
Cannon did not recommend buying banks going into earning season due to the likelihood of consensus estimates coming down in the quarter. But on the plus side, he said, valuations seem to show that further weakness is expected.
(GRAPHIC – Bank S&P vs S&P Valuation 500: here)
The S&P Bank index received 14% to date, compared with a prepayment of 16.5% for the S&P 500. S & P of 16.4.
Bank valuations are attractive to Manulife's Welch, which is not expected to retreat any time soon.
“If we are wrong and get a mild recession, we think the banks will be much better than they are in a financial crisis, she said, citing underwriting improvements.
However, after a handful of weak manufacturing data, Cronin Aberdeen Standard is looking for data to stabilize before the sector is proposed.
“There is a lot below the prices in the stocks but overall I still say I am not really positive on the group yet,” he said.
Reporting by Sinéad Carew to further reporting by Imani Moise and Elizabeth Dilts Marshall; Edited by Alden Bentley and Rosalba Brien
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