How Banking ETFs Are Behaving Post Earnings

The financial sector, which accounts for around one-fifth of the S&P 500 index, is now busy with Q2 earnings releases. The going is good so far, with five big banks crushing estimates on both lines and Wells Fargo beating on earnings but missing on revenues.

The Zacks Sector Rank for some top banks is in the top 19%. However, the downtrend in the benchmark U.S. Treasury yields in recent times thanks to a dovish Fed rate hike outlook and geopolitical risks are concern for the banking sector. Let’s take a look at banking earnings in detail:

Big Bank Earnings in Focus

Rising interest rates and loan growth drove JPMorgan Chase & Co.’s (NYSE:JPM) second-quarter 2017 earnings to $1.82 per share, crushing the Zacks Consensus Estimate of $1.57. Also, the figure reflects a 17% rise from the year-ago period. Managed net revenue of $26.4 billion was up 5% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $24.8 billion. An 8% jump in interest income spurred by rising rates and an advancement in the number of loans facilitated revenue improvement.

Citigroup (NYSE:C) reported 2% year-over-year expansion in revenues to $17.9 billion helped by the retail division and investment banking. The revenue figure also surpassed the Zacks Consensus Estimate of $17.3 billion. The company’s income from continuing operations per share of $1.27 for the quarter outpaced the Zacks Consensus Estimate of $1.21.

Wells Fargo & Company (NYSE:WFC) delivered a positive earnings surprise of 4.9% in the second quarter. Earnings of $1.07 per share outpaced the Zacks Consensus Estimate of $1.02. Moreover, the figure compared favorably with the prior-year quarter’s earnings of $1.01 per share. The quarter’s total revenue was $22.2 billion, slightly below the Zacks Consensus Estimate of $22.3 billion but in line with the prior-year quarter figure. Wells Fargo witnessed a slump in car loans and tighter lending standards hurt the segment, going by article published on BBC News. Lending was also stagnant.

Driven by increase in net revenues in equity securities, The Goldman Sachs Group (NYSE:GS) reported earnings per share of $3.95 in the second quarter of 2017, beating the Zacks Consensus Estimate of $3.36. Further, the bottom line witnessed 6% year-over-year improvement. Goldman’s net revenue edged down 1% year over year to $7.89 billion in the quarter under review. However, revenues outpaced the Zacks Consensus Estimate of $7.57 billion.

However, lower fixed income revenues were a drag. Goldman’s FICC trading recorded its lowest revenue in any single quarter since 2008. Institutional Client Services division and Investment Banking division suffered in the quarter.

Higher investment banking fees as well as loan growth can be attributed to Bank of America Corp.’s (NYSE:C) second-quarter 2017 earnings of $0.46 per share. The figure was 12% higher than the prior-year quarter. Net revenue amounted to $23.1 billion, up 7% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $21.9 billion. Loan growth supported revenues.

Continued strength in equity trading drove Morgan Stanley’s (NYSE:MS) second-quarter 2017 earnings of $0.87 per share, which easily surpassed the Zacks Consensus Estimate of $0.76. The reported figure was 16% above the prior-year quarter. Net revenue amounted to $9.5 billion, reflecting a rise of 7% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.3 billion.

Market Impact

Investors, who still have their hopes pinned on an upbeat earnings season, Trump’s promises for deregulation and faster Fed policy tightening, must be keen on knowing how financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, PowerShares KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH responded to the earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Most of these ETFs slipped in the last five days (as of July 17, 2017) – in the peak of the earnings season. Only IYF and IAI logged modest gains of about 0.5% each in the last five days (as of July 17, 2017) (read: Strong ETF Inflows Boost BlackRock Earnings).

What Led to the Underperformance Despite Beat?

The yield on the 10-year note are on a declining mode thanks to political uncertainty and some downbeat economic numbers. This once again stirred speculation over whether the Fed will be able to enact one more rate hike this year, which is likely to weigh on banks’ future net interest income (read: Why Bank ETFs Fell on Friday Despite Decent Earnings?).

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