CHICAGO, April 11, 2014 /PRNewswire/ -- Director of Research Sheraz Mian says, "The 2014 Q1 earnings season has gotten off to a relatively soft start."
Banks in Focus as Q1 Earnings Season Ramps Up
The 2014 Q1 earnings season has gotten off to a relatively soft start. Low expectations essentially guarantee that we are unlikely to get any major negative surprises. But as with economic data, the market has likely moved past the Q1 numbers and is looking ahead to the coming periods when earnings growth is expected to accelerate.
The focus in the coming days will be on the Finance sector, which was a stalwart growth contributor in recent quarters but is expected to see a decline in Q1. Total earnings for the Finance sector, the largest in the S&P 500 expected to bring in almost 1/5th of the index's total earnings in 2014, are expected to be down -8.7% in Q1. This follows double-digit earnings growth for the sector in the last many quarters.
The earnings decline is particularly pronounced for the banking industry, the largest in the Finance sector accounting for almost 40% of its total earnings. Total earnings for the banking industry are expected to be down -17.1% from the same period last year. The brokerage industry, which accounts for about 1/10th of the sector's total earnings, is expected suffer -6.8% decline in total earnings in the quarter.
A combination of effective cost controls, reserve releases, strength in the mortgage business and only modest improvement in the core business helped the banking industry scale its prior cyclical peak in profitability. As you can see in the chart below, total bank industry earnings are already past the prior peak, even though returns remain below those levels.
Estimates for the banks and brokers came down as it became increasingly obvious that weakness in the capital markets business will add to existing mortgage banking woes. The capital markets business, particularly on the fixed income side has been weak for a while and we will likely see a continuation of that trend in Q1, with fixed income revenues offsetting gains on the advisory sides. The ever present legal/compliance costs also don't seem to be going away either and have effectively become a recurring part of the business model.
The negative estimate revisions for J.P. Morgan (NYSE:JPM-Free Report), Citigroup (NYSE:C-Free Report) and Bank of America (NYSE:BAC-Free Report) among the major banks and Goldman Sachs (NYSE:GS-Free Report) and Morgan Stanley (NYSE:MS-Free Report) among pure-play brokers in recent days all reflect these negative factors to varying degrees.
On the positive side for the banks, net interest margins appear to have stabilized and the demand outlook for commercial & industrial and real-estate loans has started improving. The overall size of loan portfolios will likely see limited growth, as growth in consumer categories like credit cards, mortgages and home-equity loans remain essentially non-existent. The growth in these categories in Q1 will likely be muted by seasonality factors, but the expectation is that management teams will talk up the outlook on that front for the rest of the year.
Overall Q1 expectations remain low, with total earnings for the S&P 500 expected to be down -4.1% from the same period last year on +0.7% higher revenues and modestly lower margins. As has been the trend for more than a year now, estimates for Q1 came down sharply as the quarter unfolded. The current -4.1% decline in total Q1 earnings is down from +2.1% growth expected at the start of the quarter in January.
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