Zacks Earnings Trends Highlights: JPMorgan and Citigroup

Zacks Earnings Trends Highlights: JPMorgan and Citigroup

For Immediate Release

Chicago, IL – October 8, 2020 – Zacks Director of Research Sheraz Mian says, “Overall profitability will remain constrained by a difficult interest rate environment, partly offset by continued momentum in capital markets businesses”

Q3 Bank Earnings in the Spotlight Next Week

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • The big banks that will kick-start the Q3 earnings season for the Finance sector are expected to have fewer credit-quality issues relative to the first half, but overall profitability will remain constrained by a difficult interest rate environment, partly offset by continued momentum in capital markets businesses.
     
  • This earnings season is expected to show continued improvement in the overall outlook, a trend that has been in place since early July and that has been showing up in steadily rising earnings estimates.
     
  • For 2020 Q3, total S&P 500 earnings are expected to decline -22.3% on -2.9% lower revenues. This is an improvement from the -26.5% earnings decline expected at the start of July and follows the -32.3% earnings drop in Q2.
     
  • Sectors with the weakest Q3 growth outlook remain the social-distancing exposed spaces like Transportation (-122.9% earnings decline), Energy (-105.3%), and Consumer Discretionary (-85.1%).
     
  • Out of the total 16 Zacks sectors, 14 sectors are expected to experience earnings declines in Q3, with Construction and Medical as the only sectors expected to show earnings growth.
     
  • Utilities (-3.5%), Technology (-4.1%), and Retail (-4.5%) are the sectors with the lowest expected earnings declines in Q3.
     
  • Q3 earnings for the Finance, Industrial Products and Basic Materials sectors are expected to be down -23.1%, -25.6% and -25.3% from the year-earlier period, respectively.
     
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -20.4% on -4.7% lower revenues. As with Q3 estimates, full-year estimates have improved since early July.
     
  • Growth is expected to resume next year, thanks to easy comparisons, but the dollar level of earnings in 2021 will still be below the 2019 level.
     
  • The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 26.4X and index close, as of October 6th, is $127.24, down from $159.90 in 2019. Using the same methodology, the index ‘EPS’ works out to $158.85 for 2021 (P/E of 21.2X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
     
  • Please note that while full-year 2021 earnings for the S&P 500 index are currently expected to be up +24.8% from the 2020 level, the absolute dollar amount of 2021 earnings estimates remain below the 2019 level.
     
  • For the small-cap S&P 600 index, Q3 earnings are expected to be down -38.9% from the same period last year on -7.2% lower revenues, which would follow a -65.3% decline on -18.0% lower revenues in 2020 Q2.
     
  • For full-year 2020, the S&P 600 index is expected to experience a -39.6% decline in earnings on -7.6% lower revenues, with easy comps pushing earnings growth to +45.1% in 2021.

The stock market has made impressive gains from the March low, with the S&P 500 index close to its highs. But the Finance sector, particularly the big banks, have largely been missing in action from this rally.

You can see this clearly in the year-to-date performance chart of the S&P 500 index, the Zacks Major Banks industry and JPMorgan JPM.

JPMorgan will be kicking off the Q3 reporting cycle for the industry, along with Citigroup C, both part of the Zacks Major Banks industry represented by the green line in the chart above, by reporting its quarterly results before the market’s open on October 13th.

Driving the group’s stock market underperformance is the business’ cyclical exposure to the pandemic-driven economic downturn. The group suffers not only through reduced demand for credit, but it also undergoes a downgrade in the quality of its assets as many of its existing borrowers find it difficult to pay back their loans. On top of all this, are margin pressures resulting from the Fed’s resort to monetary easing as a response to the economic downturn.

This diminution in credit quality shows up as a direct offset to profitability in the form of reserves for loan losses, a big drag on banks’ profitability in the first half of the year. Recent management commentary suggests that the better than expected recovery in the economy will result in banks booking smaller provisions in their Q3 reports relative to what they booked in the first half of the year.

Continued momentum in capital markets activities and advisory services should also support Q3 results, though that is only for the likes of JPMorgan, Citi and other money center operators that operate strong investment banking franchises in addition to conventional banking. The core conventional banking business is expected to remain under pressure as a result of compressed net interest margins and weak loan demand.

For the Finance sector as a whole, total Q3 earnings are expected to be down -23.1% from the same period last year on -1.3% lower revenues. The aforementioned Zacks Major Banks industry, which accounted for 31.3% of the Finance sector’s total earnings in the trailing 4-quarter period, is expected to experience -40.6% decline in earnings on -6.1% lower revenues. This is an improvement from the group’s earnings performance in the first half of the year.

You can see in this chart that the group’s profitability fortunes aren’t expected to change that much through the last quarter of the year either. But I strongly feel that estimates for 2020 Q4 will move up significantly if management teams paint a favorable view of underlying business trends.

Beyond the Finance sector, total Q3 earnings for the S&P 500 index are expected to be down -22.3% from the same period last year on -2.9% lower revenues. Estimates have steadily gone up since the quarter got underway.

We are seeing a similar improvement in estimates for Q4 2020 and full-year 2021 as well, a trend that we expect to remain in place as companies report Q3 results and discuss trends in underlying business conditions.

The recent flow of economic readings has been broadly positive, suggesting that the hoped-for recovery is firmly in place. This is showing up in earnings estimates as well, as indicated earlier. The hope is that this improving trend can be sustained even as the underlying health issue remains unresolved.

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