Zacks Industry Outlook Highlights: Bank of America, JPMorgan Chase, Citigroup and Wells Fargo

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Dec 03, 2014, 09:30 ET

CHICAGO, Dec. 3, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Banks, including Bank of America Corp. (NYSE:BAC-Free Report), JPMorgan Chase & Co. (NYSE:JPM-Free Report), Citigroup Inc. (NYSE:C-Free Report) and Wells Fargo & Company (NYSE:WFC-Free Report).

Industry: U.S. Banks

Link: http://www.zacks.com/commentary/35670/us-banks-gaining-ground-on-industry-challenges

The tide of operating environment has not been in favor since the beginning of the year, but the U.S. banks proved their mettle and stayed afloat. The early-year gloom turned into a display of resilience in the last two quarters. In spite of the nagging, and perhaps heightened, structural pressure and weakness in key segments – capital market business and mortgage banking, cost containment and modest improvement in some segments managed to counter the stress.

Capital market activity is unlikely to show any significant improvement in the upcoming quarters, with no clear direction for market volatility. But the issuance volume should show an uptrend with market recovery. On the other hand, the uncertainty over interest rates will keep mortgage activity feeble.

With depressed demand for fresh mortgages and fewer avenues for new originations, lenders might see a lower profit margin in the quarters ahead. However, the recent pickup in refinancing may drive mortgage origination revenues, at least in the near term.

Though overall loan growth remains tepid due to the dearth of mortgage demand, banks have been witnessing improving trends in auto lending and credit cards. Also, a pickup in commercial real-estate lending has helped banks with significant exposure. Further, the boom in M&A and IPO activities is leading to solid investment banking business.

Legal costs are now part and parcel of bank financials. In fact, legalities were acute for a few big banks -- including Bank of America Corp. (NYSE:BAC-Free Report), JPMorgan Chase & Co. (NYSE:JPM-Free Report), Citigroup Inc. (NYSE:C-Free Report) and Wells Fargo & Company (NYSE:WFC-Free Report) -- in the last few quarters. With increasing regulatory scrutiny on the business model, banks are not expected to get rid of such expenses, at least in the near term. However, renewed settlement efforts by banks should take the burden off their shoulders.

Along with the tough operating environment, too many mandatory defensive measures -- such as maintaining higher capital ratios -- are thwarting growth. Further, the advanced technology requirements, primarily for cyber security, are eating away a large share of funds. This, along with investments for new revenue sources, will keep any remarkable bottom-line improvement at check in the quarters ahead.

However, banks have been trending toward higher fees to dodge the pressure. Easing lending standards after complying with regulatory guidelines has also become a trend. Continued expense control and balance sheet restoration should also act as tailwinds in the upcoming quarters. Further, a favorable equity and asset market backdrop plus supportive macroeconomic factors -- such as falling unemployment, a progressive housing sector and flexible monetary policy -- should pave the way for stability.

Interest rate spreads are unlikely to support the top line soon as the Fed intends to keep interest rates low for a considerable time –– at least no revision is expected before mid-2015. Moreover, liquidity coverage rule (LCR) requirements will keep net interest margins under pressure.

Zacks Industry Rank

Within the Zacks Industry classification, U.S. banks are broadly grouped in the Finance sector (one of 16 Zacks sectors) and are further sub-divided into six industries at the expanded level: Banks-Major Regional, Banks-Midwest, Banks-West, Banks-Northeast, Banks-Southeast and Banks-Southwest. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. (To learn more visit: About Zacks Industry Rank)

As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for Banks-Midwest is #32, Banks-Northeast is #66, Banks-Southwest is #75, Banks-Southeast is #92, Banks-West is #94 and Banks-Major Regional is #99. Considering the Zacks Industry Rank of the six banking industries, one could safely say that the outlook for the group is 'Neutral' to 'Positive.'

Earnings Trends

All companies in the 'Banks-Major' and 'Banks & Thrifts' industries, which are the medium-level (or M-level) components of the broader Finance sector, have reported Q3 results. For 'Banks-Major,' the beat ratio (percentage of companies coming out with positive surprises) was 33.3% for both earnings and revenues. The earnings picture for 'Banks & Thrifts' however was stronger with beat ratio of 60%. 'Banks & Thrifts' delivered a revenue beat ratio of 20%.

Earnings and revenue beat ratios for the broader Finance sector came in at 70.4% and 63%, respectively. The sector has witnessed a year-over-year earnings increase of 3.8% on 5.8% revenue growth. This compares favorably with prior quarter's earnings and revenue growth of 0.9% and 2.5%, respectively.

Banks-Major witnessed an earnings decline of 11% compared with a decline of 2.7% in Q2. Banks & Thrifts however enjoyed an earnings improvement of 18.7% compared with 8.9% in the prior quarter. On the revenue front, Banks-Major experienced a 2.5% improvement versus 3.9% decline in Q2. Banks & Thrifts, however, showed a revenue decline of 1.1% compared with 1.8% decline in the prior quarter.

The broader Finance sector's consensus earnings expectations for Q4 look better, with a 6.9% year-over-year growth rate.

For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.

The Road Ahead

The industry is not likely to return to its pre-recession glory anytime soon. But what encourages us is that the U.S. banks are getting accustomed to increased legal and regulatory pressure and resorting to safer alternatives for higher returns. However, structural changes in the sector will continue to impair business expansion and investor confidence for some time.

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