Bank Earnings: JPM, WFC And C Report Q2 Results Before The Bell On Friday

JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC and Citigroup Inc C report second-quarter results before market open Friday, July 14. After last year’s post-election rally, these stocks and others in the financial sector have been on more of a roller coaster ride so far this year.

Over the past several weeks, bank stocks rallied following the House’s proposal to roll back the Dodd-Frank Act and on results of the Fed’s stress test—a yearly examination to ensure the nation’s largest banks have enough capital to weather a financial crisis and still be able to lend to consumers and businesses.

All of the banks tested passed this year, the first time that’s happened in seven years. Following the positive outcome, banks publicly released their capital plans, with some of the biggest banks announcing dividend hikes of a few percent to as much as doubling payouts, and plans to repurchase more than $10 billion of common stock over the next year.

In addition to the stress tests, another area of focus for banks has been the Fed’s rate hikes and how they plan to go about reducing their $4.5 trillion balance sheet. A lot of uncertainty regarding rate hikes diminished this year when the Fed announced plans to increase their benchmark rate once more in 2017, and attention shifted towards the Fed’s plans to unwind assets as well as the European Central Bank’s monetary policies.

As this year progressed, the yield curve flattened to almost 10-year lows according to Reuters. If the spread between long-term and short-term interest rates continues to shrink it could pressure earnings in the sector because banks tend to borrow in the short-term and lend to consumers and businesses over longer periods of time (mortgages, long-term company debt, etc.) Despite the Fed’s rate hikes, banks have kept depositor rates low, which could help boost net interest income—the difference between revenue the bank generates from assets and the expenses associated with paying its liabilities

Today, Fed Chair Janet Yellen is scheduled to speak with the House Financial Services Committee as well as answer their questions, which could possibly provide additional insight into the Fed’s plans. There’s been a divide in Congress over the approach to hiking rates and unwinding the balance sheet, with concerns that if they move too fast it could impact the sluggish economic recovery.

JP Morgan Chase Q2 Earnings and Trading Activity

If you’re interested in learning more about what’s happening in the global economy, consider listening to JPM’s earnings conference call. Due to the size and scope of its business, CEO Jamie Dimon often discusses macroeconomic factors impacting markets across the world. 

For the quarter, JPM is expected to report earnings of $1.57 per share, up two cents from the same quarter last year, on revenue of $24.8 billion, according to third-party consensus analyst estimates. Revenues are expected to decline 1.5% compared to Q2 2016. Last quarter the bank’s trading revenues increased, partially due to heightened volatility in markets.

As volatility diminished in recent months, several companies including Bank of America Corp BAC, Goldman Sachs Group Inc GS, Morgan Stanley MS, and JPM announced they’ve experienced weakness in fixed income, currencies and commodities (FICC) trading as well as equities trading, and expect revenues from those divisions to decline this quarter.

The options market has priced in just under a 2% potential stock move in either direction around the earnings release, according to the Market Maker Move  indicator on the thinkorswim^® platform. At the July 14 weekly expiration, options activity for calls has been the heaviest at the 93 strike price, but there’s been a decent amount of volume at the 94 and 95 strikes as well. Puts have been active at the 91 and 91.5 strikes, which is where the stock is coming from after its recent increases. As of this morning, implied volatility is at the 33rd percentile. 

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.

FIGURE 1: BANKS RALLY IN JUNE. JPM (blue line), WFC (purple line) and Citigroup’s (teal line) year-to-date performance as of this morning is charted above on the thinkorswim® platform by TD Ameritrade. The banks gave up their gains halfway through the year, but started rallying again at the beginning of June. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Wells Fargo Q2 Earnings and Trading Activity

In recent news, a federal judge granted preliminary approval for WFC’s $142 million class action settlement with customers who had fake accounts created in their names. In a statement, CEO Tim Sloan called the ruling “a major milestone in our efforts to make things right for our customers.” The scandal has weighed on the bank for several quarters now.

When WFC releases results, it’s expected to report earnings of $1.02 per share, up one cent from the same quarter last year, on revenue of $22.3 billion, roughly flat to last year, according to third-party consensus analyst estimates.

In options activity, traders have priced in just over a 1.5% potential stock move in either direction around the earnings release, according to the Market Maker Move. At the July 14 weekly expiration, options activity for calls has been pretty light and spread out across strike prices, while puts have been active at the 54.5 and 55 strikes. As of this morning, implied volatility is at the 42nd percentile. 

Citigroup Q2 Earnings and Trading Activity

For second-quarter earnings, C is expected to report earnings of $1.21 per share, three cents below Q2 2016’s earnings, on revenue of $17.3 billion, down just over 1% compared to the same period last year, according to third-party consensus analyst estimates.

Like the other banks mentioned above, C has indicated it expects trading revenues to decline this quarter. At Morgan Stanley’s financial conference, CFO John Gerspach said “Volatility has been very low this quarter, which has certainly led to somewhat of a softer trading environment, especially in the fixed income and equity markets.”

Options traders have priced in just over a 2% potential stock move in either direction around the earnings release, according to the Market Maker Move. At the July 14 weekly expiration, options activity for calls has been active at the 67 and 69 strike prices, while puts have been active at the 64.5 and 66.5 strikes. As of this morning, implied volatility is at the 32nd percentile. 

Looking Ahead

This is the first round of big bank earnings, with Bank of America (BAC) and Goldman Sachs (GS) reporting second-quarter results before market open on July 18, and Morgan Stanley (MS) on July 19 before market open. Traders will likely be keeping an eye on Janet Yellen’s congressional testimony today for additional information on the Fed’s future plans.