The financial sector will kick off earnings season Friday with JPMorgan Chase (JPM) and Wells Fargo (WFC) releasing third-quarter results, but Wall Street will be keying on some very different challenges facing the two big banks.
Both bank stocks will be sorely tested by rising interest rates, which are hurting heretofore strong growth in the mortgage and refinancing businesses. After all, WFC is the nation’s top mortgage lender, and JPM is No. 2.
But while analysts and investors will be scouring Wells Fargo earnings for changes in mortgage volume and net interest margins — normal banking stuff — at JPM, all eyes will be on how the bank is dealing with the latest in a string of multibillion-dollar fines and legal charges.
JPMorgan Earnings Forecast
More than anything, analysts will want to know if JPM plans to settle with the Justice Department over alleged abuses connected to mortgage-backed securities. Reports put the cost of that settlement at $11 billion — an amount the bank has already shelled out to dispense with other fines and settlements.
Mind you, Wall Street doesn’t care about the dollar amount so much. Even at $11 billion, it’s really just the cost of doing business for JPM at this point. Rather, it’s that Wall Street hates uncertainty, and the cloud hanging over the bank’s head until it puts its regulatory and legal woes to rest.
Other challenges weighing on JPMorgan earnings will be a slowdown in mortgages, sluggish loan growth and weaker results from trading after one of the sleepiest summers in recent memory.
Analysts, on average, forecast JPMorgan earnings to decline to $1.21 per share from $1.40 a year ago. Revenue is forecast to fall more than 7% to $24.03 billion from $25.86 billion in last year’s third quarter.
But be advised that any selloff on earnings is likely to be a buying opportunity.
For the year-to-date, JPM stock has generated a total return (that includes the healthy 3% dividend) of 21.4%, vs. the S&P 500’s total return of 19.8%. Despite its myriad problems, JPMorgan — the nation’s biggest bank by assets — still has a place in your financial sector portfolio.
Wells Fargo Earnings Forecast
As for Wells Fargo — the nation’s biggest bank by market capitalization — the Street will be concerned with the more prosaic aspects of boring old banking. WFC has already warned that it’s seeing a big drop off in refinancing volume, so that should be baked in.
More important will be the trend in WFC’s net interest margin, which showed signs of picking up in the previous quarter. NIM — the difference between what a banks pays on deposits and charges for loans — has been under pressure industrywide for years, hurt by the low-rate environment.
But now, changes to WFC’s loan portfolio and rising rates are finally allowing net interest margin to be a wind at WFC’s back.
Wall Street expects earnings to rise to 97 cents a share from 88 cents recorded in last year’s third quarter. Revenue is forecast to slip 1.1% to $20.97 billion, hurt mainly by the slowdown in the mortgage and refinancing business.
Like JPM, WFC stock pays a healthy dividend — one that has helped it be a market-beater in 2013. The total return comes to 22.9% so far this year. WFC also is a buy-on-the-dip stock.
If we had to choose just one, WFC is the better stock between the two. But if you’re betting on the financial sector, ideally you would own both these names.
Besides, if you’re bullish on the market, you have to be bullish on banks, because it’s pretty much impossible to have sustained upside without them.
Given that leadership position, JPM and WFC’s third-quarter earnings should help clarify what the market has in store as we approach the end of the year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.