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Search for Bright Spots on by Investors as US Banks Prepare to Present Grim Earnings Reports


04/09/2016


Search for Bright Spots on by Investors as US Banks Prepare to Present Grim Earnings Reports
Even as US banks are expected to report their results as earnings season gets under way next week analysts are expecting first-quarter reports in the financial sector to show a 9.2-percent decline in earnings and a 0.2-percent rise in sales.
 
However the fine print in the results, and what bank bosses say, according ot some analysts would be critical and could actually help these long-suffering stocks bounce back.
 
Grim first-quarter revenues and profits are expected to be reported starting on Wednesday by four of the S&P 500's top-weighted banks, J.P. Morgan Chase, Wells Fargo, Bank of America and Citigroup.
 
Down by 8 percent as the broader S&P 500 is flat, the financials .SPSY have been the worst performing S&P 500  sector this year.
  
"We think banks are about as low as they can go," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
 
Compared to the rest of the market, bank shares are cheaper. Compared with 16.7 times forward earnings for the broader S&P 500, companies in the S&P financial sector are selling at roughly 12.8 times estimated earnings over the next 12 months.
 
In order to determine if the low prices present buying opportunities or simply reflecting the sad reality of poor earnings for some time to come, investors like Ghriskey will be parsing those reports.
 
He will look beyond the numbers in the case he can gleam optimistic forecasts from bank managers, said Ghriskey adding that he'd be "very surprised to see positive earnings". His firm is modestly overweight on financial services.
 
As banks have battled prolonged low interest rates, faced an onslaught of pricy reform mandates, and, more recently, were hit by lending to risky oil and gas companies, the sector has remained troubled since the global financial crisis.
 
It won't be easy for banks to prove their shares are a good buy even at seabed-low prices.
 
According to Thomson Reuters data, the energy sector, which is facing its first quarterly loss in at least a decade and is expected to be the biggest drag on the S&P 500 and investors will look for notes about the type of exposure banks have to this sector.
 
If banks are able to show a relatively healthy energy portfolio or that they are losing less money than expected on energy loans then the shares of those banks shares could become more appealing. If oil prices are in fact settling, as has seemed to be the case recently, their forecasts might also strengthen.
 
U.S. oil prices had stabilized near $40 in March after having fallen to a low of about $26 a barrel by mid-February.
  
Nomura senior analyst Steven Chubak said that investors will also look for signs of strength in banks' investment and trading arms.
 
"Any constructive comments on the capital markets outlook would be well-received given the very challenging operating backdrop in Q1," Chubak said.
 
Investors will be looking for opportunity due to the low prices, said Kim Forrest, vice president at Fort Pitt Capital Group in Pittsburgh even as it is not expected that much from the financial sector would be going into earnings week.
 
Commentary about an increase in the demand for loans and banking products could be an incentive to buy.
 
 "That could propel their shares higher," Forrest said.
 
(Adapted from reuters.com) 


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