Banks At Earnings Ready Friday, Cut Wells Fargo's Conference Call May Be Most Noteworthy

The third-quarter earnings season focus shifts to three of the nation’s largest banks, which report results ahead of the bell Friday and are, to many traders, the real start of the period. First up are JPMorgan Chase & Co. JPM, Citigroup Inc C and the beleaguered Wells Fargo & Co WFC.

As a group, the big banks aren’t expected to rock Wall Street’s expectations, as the industry continues to wrestle with regulatory issues and shrinking profits amid this low-interest rate environment. While the trading climate for big banks appears to have improved, the fundamentals don’t look as robust as some would like, according to analysts.

Sam Stovall, chief equity strategist at CFRA Research, expects flat Q3 net interest income, noninterest income and total revenues, but he expects an improvement from the declines of previous quarters, he said in a research note. “Planned reductions continue to affect C’s revenues, but the rest of the large banks will likely show some year-over-year revenue growth,” he wrote. The key word here is “some,” which, according to Wall Street’s forecasts, won’t be much.

The Firestorm at WFC

Let’s take a look at the first of the three, WFC, which has been mired in controversy and widespread criticism over a sham customer account scandal that broke in September. The bank agreed last month to pay $185 million in fines for illegally opening millions of accounts for unsuspecting customers. Thousands of employees were let go over the scandal, and CEO John Stumpf was put on the defensive, appearing twice before Congressional committees, which took him to task over company practices.

On Wednesday, only two days before the bank’s Q3 earnings and investor conference call, Stumpf unexpectedly sent a letter to his board announcing he would retire immediately, according to a number of published reports. On Friday, Timothy Sloan, WFC’s president and chief operating officer, will man the conference call as the new CEO.

Investors likely want to know what’s next. How will WFC handle operations going forward? How much has this scandal cost the bank in fines, in any remaining obligations, in lost revenues and business, in lost market capitalization and reputation? What is left to be done to meet new regulatory investigations, including a Labor Dept. probe into retaliation against whistleblowers? What is the effect on the bank’s business model, and is there more fallout ahead? And how will WFC regain trust with customers and rebuild business in the retail bank?

That’s all forward-looking information and doesn’t even take much of Q3’s results into account. Analysts reporting to Thomson Reuters are pegging a per-share profit of $1.01 on revenues of $22.2 billion. That’s about flat to the year-ago results as well as the Q2.

Short-term options traders have priced in a potential 2% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

Ahead of earnings, traders were mostly focusing on the 46-strike calls and the 45-strike puts. The implied volatility is relatively high at the 40th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Fewer Flames at JPM

When JPM reports results ahead of the bell, analysts may be more interested in how Chief Executive Jamie Dimon is reading the consumer tea leaves for the fourth quarter and beyond than for the results from the previous quarter. Last quarter, JPM handily outpaced Wall Street’s expectations and its stock price has risen about 7% since then, though it has traded in a fairly tight range in recent weeks. How likely is a repeat performance?

The Q2 earnings were powered partly by trading activity and loan growth, and some analysts say they don’t expect a repeat of that in the Q3. “Trading revenues are likely to improve, primarily driven by higher fixed-income trading, but may compare unfavorably with the big jump in the second quarter caused by Brexit-induced uncertainty,” according to the Nasdaq site. Low interest rates have likely been a hindrance to loan origination and, as they are for many financial institutions, a drag on revenues and profits.

For the quarter, analysts polled by Thomson Reuters see, on average, profit of $1.40 per share on top line sales of $23.9 billion. That’s well off the year-ago earnings of $1.68 a share, though sales are a bit higher than last year’s $23.5 billion.

Short-term options traders have priced in a slim 1.87% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

Options trading has been slow, with calls at the 68.5 strike and puts at the 67- and 67.5-strike points. The implied volatility is at the 22nd percentile.

Few Sparks May Flicker at C

Wall Street is forecasting the third straight drop in earnings and revenue for C, but the bank group may see an uptick in its U.S. credit-card business tied to its new partnership with Costco. Strength in C’s currencies and interest-rate trading businesses were up in the “mid-single digits” percentage range, C’s chief financial officer said last month, according to published reports. But investment banking was running a “little lighter than we had estimated,” he added. C may also report higher than expected expenses linked to the recently announced four-year, $1.5 billion investment in its Mexico operations.

To that end, Thomson Reuters analysts are looking for $1.16 a share profit on revenues of $17.3 billion. Last year at this time, C turned in $1.35 a share earnings on sales of $18.5 billion.

Short-term options traders have priced in a 2.7% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

Options trading has been active at the 50-strike calls and the 47.5-strike puts. The implied volatility is at the 22nd percentile.

Probability analysis results from the Market Maker Move™ indicator are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.