ETFs
How will banking ETFs perform in light of second quarter results?
Major banks will begin reporting quarterly figures this week. Let’s take a closer look at the earnings potential of the six largest banks that could boost sector performance.
According to our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), combined with a positive Earnings ESP, increases our chances of predicting higher earnings, while companies with a Zacks Rank #4 or 5 (Sell rating) are to be avoided. You can discover the best stocks to buy or sell before they are released with our Earnings ESP Filter.
Inside our surprise prediction
Among the six big ones, JPMorgan Chase & Co. JPM, Wells Fargo & Company CFM, Citigroup Inc. C and should report on July 12. The Goldman Sachs Group GS is expected to release its results on July 15. Bank of America Company BAC and Morgan Stanley MS is expected to report on July 16.
JPM has a Zacks Rank #3 and an Earnings ESP of +0.57%.
WFC has a Zacks Rank #3 and an Earnings ESP of +0.50%.
It has a Zacks Rank #3 and an Earnings ESP of -1.31%.
GS has a Zacks Rank #3 and an Earnings ESP of -1.35%.
BAC has a Zacks Rank #3 and an Earnings ESP of -0.46%.
MS has a Zacks Rank #3 and an Earnings ESP of -1.39%.
Are Negative ESPs a Threat to Financial ETFs?
As we saw above, the chances of a better-than-expected profit are low to moderate, as most stocks currently have a negative ESP. Some of the largest U.S. banks could report weaker second-quarter profits as they earn less interest and set aside more money to cover loan deterioration to offset higher credit losses, according to analysts cited by Reuters.
Risks of higher losses on commercial and industrial (C&I) loans could weigh on banks’ results this time around compared with the same period last year. Under the Fed’s stress test scenario, C&I loss rates are expected to rise to 8.1%, up from 6.7% in last year’s test.
A hope ?
Despite negative ESPs, we believe that financial stocks and ETFs are likely to see gains in the coming days due to the likelihood of a steepening of the yield curve. The US is currently going through a period of tight monetary policy. However, there is a high probability that the Fed will deliver at least one rate cut by the end of the year. This in turn could steepen the yield curve.
Banks seek to borrow money at short-term rates and lend at long-term rates. The steepness of the yield curve increases the yields on loans and deposits, leading to a wider spread. This increases net margins and boosts bank profits.
Net interest income is likely to bottom out in the second or third quarter before starting to rise again, as banks begin to negotiate new loans at relatively higher rates, according to a banking analyst at Oppenheimer (cited by Reuters).
The story continues
Moreover, mergers and acquisitions are a significant component of banks’ profit picture. M&A volumes reached $1.6 trillion globally in the first half of the year, up 20% from a year earlier, according to data from Dealogic, cited by Reuters. Equity capital market volumes jumped 10% over the same period.
Conclusion
So, regardless of the earnings surprise, investors can play these financial ETFs based on the movement of the yield curve. Therefore, investors pinning their hopes on a banking recovery should be keen to know how financial ETFs are performing. iShares U.S. Financial Services Exchange Traded Fund (ETF) I am young, iShares US Financials ETF JIF, Invesco KBW Bank Exchange Traded Fund KBWB, SPDR Financial Sector Selected XLF and Vanguard Financials Exchange Traded Fund (ETF) VFH funds are invested before their results are published. These funds have considerable exposure to the above-mentioned stocks.
Goldman has moderate exposure to the aforementioned ETFs. It is heavy iShares ETFs for US Brokers and Exchanges IAI.
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Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
Bank of America Corporation (BAC): Free Stock Analysis Report
Wells Fargo & Company (WFC): Free Stock Analysis Report
JPMorgan Chase & Co. (JPM): Free Stock Analysis Report
Morgan Stanley (MS): Free Stock Analysis Report
Citigroup Inc. (C): Free Stock Analysis Report
ETF SPDR Financial Select Sector (XLF): ETF Research Reports
Invesco KBW Bank ETF (KBWB): ETF Research Reports
iShares US Broker-Dealers & Securities Exchanges (IAI) ETFs: ETF Research Reports
iShares US Financial Services ETF (IYG): ETF Research Reports
Vanguard Financials ETF (VFH): ETF Research Reports
iShares US Financials ETF (IYF): ETF Research Reports