JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) kick off big-bank earnings season next Tuesday, and hopes are running high that some of the biggest drags on performance over the last few years are finally behind them.
Indeed, the way things are shaping up, JPM and WFC could be relative bright spots in what’s expected to be a pretty poor earnings season.
After all, the S&P 500 is forecast to suffer its first profit decline since the third quarter of 2012. Energy stocks will lead the way lower because of plunging prices for oil, but weakness should extend to stocks in the materials, utilities, telecommunications and consumer staples sectors.
In contrast to those gloomy profit expectations stand financial stocks, which are expected to produce the highest profit growth of any market sector this earnings season. The financial sector should produce profit growth of 5.3%, according to data from Thomson Reuters, with the bulk of that earnings increase being driven by big banks.
That’s because the truly punishing days of banks’ bottom line being eviscerated by legal costs and settlements are over. A pickup in volatility should help revenue from big banks’ trading operations — notably in the lucrative fixed income market — and even loan growth is thought to have picked up.
But not all big banks will deliver as much to sector earnings growth as others. Case in point: JPMorgan earnings and Wells Fargo earnings. JPM is projected to report an increase in profits, while WFC is expected to report a decline.
Here’s a quick look at JPM and WFC ahead of earnings:
JPMorgan (JPM) Earnings
Analysts surveyed by Thomson Reuters forecast JPM’s EPS to rise to $1.38 a share from $1.28 a year ago. Revenue is forecast to rise 2.2%, to $24.39 billion. Like many big banks with large trading operations, a lack of volatility in the fixed income, currencies and commodities (FICC) markets has been depressing results for more than a year.
Helpfully, anticipation of a Federal Reserve rate hike, the upward march of the strong dollar, and plunging oil prices have breathed life into FICC markets — those should benefit JPM’s bottom line. At the same time, mergers-and-acquisitions activity continues to accelerate, hitting levels not seen since the financial crisis.
JPM, with its heavy reliance on investment banking and large exposure to the capital, currency and commodities markets, stands to benefit from the big rebound in trading and IPOs.
Wells Fargo (WFC) Earnings
WFC will have to console itself with its position of being the best big-bank stock this earnings season, as earnings come under pressure from tough year-ago comparisons, a sluggish mortgage market and declining net interest margins.
WFC is projected to report EPS of 98 cents a share in the first quarter, down from $1.05 in the same quarter a year ago. Revenue is expected to grow 3%, to $21.24 billion. WFC’s investment banking business is comparatively small, so it won’t help the bottom line to the extent we should see at JPM.
Rather, the quarter looks to be a story of WFC struggling with soft mortgage lending volume. Furthermore, the release of big loan-loss reserves — which did so much to boost year-ago earnings — has come to an end.
If JPM or WFC can offer some upside surprise and a sunny outlook, it might be enough to pull the stocks out of negative territory for the year-to-date. Given its reliance on trading, which is hard to forecast, we’re more likely to see that happen with JPM. If you’re looking for a big-bank stock to pop on earnings, JPM is the better bet.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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