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Investors Await Big Banks' Q4 Earnings: What's in Store?

With bank stocks in focus on signs of a rise in interest rates in the near term, investors will be keeping a close eye on big banks' - JPM, BAC,...

This story originally appeared on Zacks

Banks are in the limelight since the Federal Reserve signaled a hawkish monetary policy stance in December 2021 FOMC meeting. With Q4 earnings around the corner for the banking sector, investors are keen to know how the banks have performed in the last quarter and will be looking for clues on what lies ahead.

Starting tomorrow and till mid-next week, the focus will be on so-called big banks – JPMorgan JPM, Bank of America BAC, Citigroup C and Wells Fargo WFC – as they come out with quarterly performances.

Before we start discussing individual performance expectations, let’s get a brief idea of the operating backdrop for these banks in the fourth quarter of 2021. The first and foremost thing that comes to our mind while thinking about banks is loan demand. This has been a sore topic for banks as demand for loans has been negligible amid the COVID-19 pandemic since March 2020. But things have perked up gradually, with the fourth quarter of 2021 recording a decent improvement in loan demand.

Secondly, over the past several quarters, banks’ earnings have benefited immensely from robust capital markets activities (both investment banking and trading). While trading volumes are gradually normalizing over the past couple of quarters, equity trading activities were solid in the fourth quarter on the back of strong equity market performance. Now, talking about investment banking (IB), trends continue to show the strong momentum that started since the third quarter of 2020.

The third factor worth mentioning is benign credit conditions. This has helped the banks to release reserves that they had accumulated to cover losses from the effects of the pandemic. With an improving macroeconomic backdrop and stable credit market conditions, banks are likely to report negative or low provisions in the fourth quarter.

Fourthly, banks’ quarterly earnings are expected to record rising expenses. Technology upgrades to align with changing customer needs amid the pandemic and business expansion via strategic buyouts and restructuring efforts are expected to lead to higher operating expenses.

Banks, which were able to withstand pandemic-induced economic slowdown and mayhem, are fundamentally strong and are ready to soar to new highs as the operating environment turns more favorable. Now, let's check how the above-mentioned factors are likely to have influenced these four banks’ performances in the fourth quarter.

JPMorgan: The banking behemoth will be the first to come out with fourth-quarter earnings on Jan 14, with the Zacks Consensus Estimate pegged at earnings of $3.01 per share. Though the bottom line has moved 1% north over the past week, it suggests a 20.6% decrease on a year-over-year basis. Disappointing mortgage banking and fixed income markets performance and rising operating expenses are likely to weigh on JPM’s earnings.

The consensus estimate for JPMorgan’s mortgage fees and related income of $549 million suggests a plunge of 28.4% from the prior-year reported number, while the consensus estimate for fixed income markets revenues of $3.31 billion indicates a fall of 16.1%.

The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s sales is $29.95 billion, suggesting a 2.5% rise.  The major factors that are expected to have supported revenue growth include solid IB and equity markets performance and decent improvement in loan demand. The Zacks Consensus Estimate for JPMorgan’s IB fees of $3.2 billion implies a 24% jump from the prior-year reported number.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. price-eps-surprise | JPMorgan Chase & Co. Quote

Bank of America: The second largest bank in the United States, BofA, is slated to announce quarterly and full-year 2021 numbers on Jan 19. The consensus estimate for BofA’s fourth-quarter earnings of 76 cents suggests a 28.8% jump on a year-over-year basis, though the number has moved 2.6% lower over the past seven days.

Also, the Zacks Consensus Estimate for BofA’s sales of $22.11 billion suggests 10% growth. The impressive performance of this Zacks Rank #3 company is likely to have been driven by robust IB performance (the company has been making efforts to strengthen this line of operation), decent trading business and a rise in demand for loans.

The Zacks Consensus Estimate for net interest income (NII) on FTE basis of $11.4 billion suggests 9.6% growth from the prior-year reported number. This is likely to have been supported by loan growth.

Per management, quarterly NII is projected to be $11.3 billion on the assumptions of the forward interest rate curve materializing, economic recovery, investing excess liquidity into securities, slightly lower expenses from premium amortization and modest loan growth, partially offset by lower interest income from PPP loans.

The consensus estimate for BofA’s IB income of $2.04 billion implies a 9.4% rise from the year-ago period. Further, the Zacks Consensus Estimate for trading income of $3 billion indicates a 4.4% improvement, with major contribution likely to be coming from equity trading income.


Citigroup: This Zacks Rank #3 bank is in the middle of a major business restructuring process, with a goal to exit 13 markets across Asia and EMEA. The company, which is also slated to report fourth-quarter and full-year 2021 numbers tomorrow, aims to pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth.

While these initiatives are expected to aid further growth over the longer term, Citigroup will be incurring huge restructuring charges in the near term. In fact, for the to-be-reported quarter, the company expects to incur $1.2 billion of expenses related to Asia divestitures, with the majority of expenses related to the winding down of its Korea consumer banking unit.

This, along with a disappointing trading backdrop, is likely to have hurt Citigroup’s fourth-quarter earnings. The Zacks Consensus Estimate for earnings of $1.40 suggests a 32.4% year-over-year decrease. Per management, strength in equities trading performance will likely offset the continued normalization in fixed income.

On the other hand, the consensus estimate for sales of $17.06 billion indicates a 3.4% rise. This is likely to have been driven by modest improvement in loan demand and robust IB performance during the fourth quarter. The Zacks Consensus Estimate for NII of $10.5 billion suggests relatively stable performance.


Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. price-eps-surprise | Citigroup Inc. Quote

Wells Fargo: With a cap imposed on its asset growth by the Fed since 2016, Wells Fargo has been striving hard to re-build its name and brand. The company, scheduled to announce fourth-quarter and full-year 2021 results tomorrow, is improving its product offerings and services. The consensus estimate for Well Fargo’s fourth-quarter earnings of $1.09 suggests a 70.3% surge on a year-over-year basis, though the number has moved almost 1% lower over the past week.

The company has made efforts to expand its credit-card offerings by launching a range of Visa cards, the Active Cash Card, in July and the Wells Fargo Reflect Card in October. The offerings are likely to have supported revenue growth for Wells Fargo in the fourth quarter. Also, like all other banks, this Zacks Rank #2 (Buy) company is likely to have recorded marginal loan growth. These factors are expected to have aided Wells Fargo’s top-line growth. The consensus estimate for sales of $18.73 billion implies a 4.5% increase from the prior-year period.

However, the mortgage banking business, which is being weighed down by tough comp from the 2020 origination boom and rising rates, is expected to drag on Well Fargo’s revenues. Per management, mortgage originations are expected to fall modestly, given the recent increase in mortgage rates and the seasonal trends in the purchase market. The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $1.08 billion for the fourth quarter, suggesting a 10.5% decline from the prior-year quarter’s reported number.

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote

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Bank of America Corporation (BAC): Free Stock Analysis Report


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