Article / 09 October 2015 at 11:45 GMT

Earnings Watch: US banks to deliver on fees and costs

Head of Equity Strategy / Saxo Bank
Denmark
  • US banks in focus during next week's Q3 earnings kick-off
  • With rate hikes being pushed further, focus is on cost, fees and trading 
  • In particular Goldman Sachs is hard to predict 
  • Also Netflix will report and we remain cautious
By Peter Garnry

The Q3 earnings season is gearing up next week with 45 companies reporting in the S&P 1200 Global Index. Next week's main theme will be US banks, which had hoped for a rate hike as the industry is longing for higher rates to increase profitability. With the Fed extending the close to zero policy the focus in Q3 will be on costs, fees and trading results.

Muddy
No rate hike in sight, so how will US banks get out of the mud? Photo: iStock 

No material gains in revenue and profit

US banks are still stuck in the mud with no growth in net revenue and earnings. Q3 will likely not change that and the outlook may be muted given the Fed's decision to not hike rates on the last FOMC meeting. The banks reporting next week are JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Goldman Sachs. 

Investors in US banks are waiting for the US rate hike as it is expected to lift interest income. Among the major banks, Bank of America has the highest sensitivity to a rate hike with a potential 10% increase in interest income from a 100 basis points parallel shift in the yield curve according to estimates from Bloomberg. 

Regional banks in general have higher sensitivity to rate hikes and as a result we have been recommending an overweight position in those names through the iShares US Regional Banks ETF (IAT:arcx).

JPMorgan and Citigroup are likely to show muted results given the global economic slowdown hurting their global business model. Goldman Sachs is always difficult to predict as it is impossible to forecast their result in the trading business. Given the Q3 volatility, their should be an upside potential to Goldman Sachs dependent on the firm not having lost on own positions.*

Can Netflix keep up its growth?

Netflix reports earnings on Wednesday at 2005 GMT with EPS expected to decline 43% y/y as the company invests heavily in its international expansion. Sales is expected to climb 24% y/y and the outlook on sales will be absolute key to investors. We remain cautious on Netflix as competition increases from multiple players with streaming on-demand looking like a future commodity business.

Netflix
If you do not feel Netflix shares are your thing, you can sell at any time. 
There is no commitment in the stock market. Screenshot: Netflix.com
 
Other earnings next week...
  • Intel reports Q3 results on Tuesday after the close. Sales and earnings are expected to decline y/y.
  • Delta Air Lines reports Q3 results on Wednesday with earnings and sales expected to be flat y/y.
  • Philip Morris International reports Q3 results on Thursday with earnings and sales expected down 19% y/y and 14% y/y respectively as the stronger USD hurts overseas profit.
  • Schlumberger reports Q3 on Thursday after the close. Earnings and sales are expected down 48% y/y and 32% y/y respectively.
  • General Electric reports Q3 results on Friday before markets open. Earnings and sales are expected to decline 31% y/y and 21% y/y respectively driven by weaker global economy and stronger USD.

* Jefferies recently reported sizeable losses tied to its fixed-income trading desk in high yield energy

Next week's earnings releases including estimates are in the attached PDF.

— Edited by Clemens Bomsdorf


Peter Garnry is head of equity strategy at Saxo Bank

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Earnings Watch - 2015-10-12

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