BMO Capital Gives Investors A Preview Of Q2 Bank Earnings

Although banks are likely to report solid 2Q earnings, concerns surrounding the direction the Fed would take, the flattening yield curve, and impact of Brexit are expected to weigh on the earnings outlooks, BMO Capital Markets’ Lana Chan said in a report.

Given the late reporting dates of the Ohio-based regionals and the Fed meeting scheduled for July 26 and 27, bank stocks could continue to be volatile until late July, analyst Lana Chan stated.

2Q Earnings Preview

Chan expects 2Q earnings to show a sequential improvement, driven partly by seasonality. Average loan growth is estimated at a solid 5.5 percent annualized. Market-sensitive revenue is expected to recover from the weak levels of 1Q. Mortgage banking is likely to strengthen, backed by lower long-term rates.

“Further, most regionals built energy-related reserves in 1Q, which will not likely recur given the bounce in energy prices; thus, loan-loss provisions should be down meaningfully linked quarter. Outside of energy, we expect credit quality to remain benign,” the analyst wrote.

Near Term Concern

Chan cited the main near-term concern as the rate environment. He elaborated, “Fed rate hike expectations have been pushed out (again) with a 0% chance of a hike in July and only a 10% chance in December (with now a 2% chance of a cut).”

Moreover, the yield curve had flattened significantly. The 10-year Treasury rate had declined from 2.30 percent at year-end 2015 and 1.79 percent at March 31 to a new historical low of 1.38 percent. Certain banks had already warned that the flatter yield curve would result in some NIM pressure. “We are now taking Fed rate hike expectations out of our estimates and assuming a flatter YC,” Chan commented.

The EPS estimates for 2016 and 2017 on average have been reduced by 2 percent and 4-5 percent, respectively.