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Wall Street earnings expectations for megabanks cooled only slightly despite deep freeze in stocks

The disconnect between healthy business performance and struggling stock prices in 2022 will likely continue for megabanks through this year’s second quarter earnings season, amid a bear market for equities.

Investors will likely be on the lookout for potential loan growth and credit quality headwinds in the banking industry like JPMorgan Chase & Co. JPM,
and Morgan Stanley MS,
are expected to report results on Thursday, July 14, as the top two of the big six U.S. banks.

Citigroup Inc. C,
and Wells Fargo & Co. WFC,
both report earnings on Friday, July 15, while Bank of America Corp. BAC,
and Goldman Sachs Group Inc. GS,
weigh-in on July 18.

Bank stocks have been dragged lower this year by the woes of the recession, although current economic conditions remain relatively strong. The stock price sell-off may seem logical, as stock market investors typically look to the future and earnings reports mostly provide a look back.

Some of the economic pessimism in the stock market has come from the banks themselves, with JPMorgan Chase CEO Jamie Dimon warning of a coming hurricane in the economy during an appearance at the Bernstein Strategic Decisions Conference.

The Financial Select SPDR ETF XLF,
ended the first half with a loss of 19.5%. The S&P 500 SPX index,
fell 20.6% in its worst first half since 1970. The Dow Jones Industrial Average DJIA,
fell 15.3% at Thursday’s close.

See market overview: Wall Street is on track to continue its rotten run, with ISM manufacturing data leading the way

Shares of Bank of America ended the first half of 2022 with a loss of 30.0% as the worst performer among the big six banks, while shares of JPMorgan Chase fell 28.9%, Citigroup of 23, 8% and Wells Fargo 18.4%.

Morgan Stanley stock had fallen 22.5% since the start of 2022 and Goldman Sachs was down 22.4%.

Putting a positive spin on weak stock performance, Deutsche Bank analyst Matt O’Connor said bank stocks were already pricing a 65% to 75% chance of a recession, suggesting a “good upside potential” in 2023.

“Despite expecting solid/strong Q2 results and likely improving outlook in H2 (thanks to higher net interest income), we do not expect recession fears to subside “, O’Connor said.

During the second quarter, the economy continued to cool as banks faced lower mortgage lending as refinances and home purchases fell in the face of rising interest rates. Some jobs have been cut at JPMorgan and elsewhere as a result.

Banks also absorbed a pause in the IPO market.

But analysts have seen little reason to cut megabank earnings forecasts by drastic margins since the end of the first quarter. Of the six banking giants, analysts cut estimates by five and raised estimates for JPMorgan Chase.

Analysts soften their earnings forecasts

JPMorgan Chase is on deck to report second-quarter earnings of $2.94 per share on revenue of $31.85 billion, according to FactSet estimates. Analysts raised their estimate of the bank’s earnings to an average of $2.79 per share as of March 31.

Analysts expect Morgan Stanley to report profit of $1.70 and revenue of $13.97 billion. The median estimate for Morgan Stanley was $1.81 as of March 31, according to FactSet data.

Next is Citigroup, which is expected to earn $1.66 per share on revenue of $18.26 billion. The bank’s second-quarter earnings forecast has fallen a penny from analysts’ March 31 estimate of $1.76 a share, according to FactSet.

Wells Fargo is expected to earn 88 cents per share on revenue of $17.72 billion. Its profit target for the second quarter was 95 cents per share on March 31.

Bank of America is expected to report earnings of 79 cents per share on revenue of just under $23.0 billion, according to FactSet. At the end of the first quarter, analysts expected the company to earn 83 cents in shares.

Finally, Goldman Sachs GS,
is on track to earn $7.86 per share on revenue of $11.66 billion, according to Fact. On March 31, analysts expected the bank to earn $9.35 per share.

BofA Securities analyst Ebrahim H. Poonawala made it clear in his June 29 upgrade from Goldman Sachs to buy-hold that the investment bank and everyone else in the industry faces a bumpy road.

“Our rating change (first update of 2022) does not indicate an improving outlook for bank stocks,” Poonawala said. “On the contrary, we believe the stock is well positioned to outperform in what is likely to be a deteriorating economic backdrop that could weigh more materially on the EPS outlook for its on-balance sheet lending peers.”

Goldman offers an attractive risk/reward profile compared to other banking stocks, he said.

“We believe volatility in interest rates, foreign exchange and commodity markets is not likely to go away any time soon and should act as a tailwind for markets,” Poonawala said. “We also expect GS’s strong risk management to mitigate any material upside surprises from market dislocations.”

Oppenheimer analyst Chris Kotowski said it’s reasonable to expect noise in banks’ second-quarter earnings, but for the most part he expects fundamental trends online.

Banks signaled their relative health at mid-June conferences such as Bernstein’s strategic decision conference and other gatherings.

“Bank after bank came out and said things were going well,” Kotowsky said in his note on Friday. “Loan growth and net interest margins (NIM) were, in any case, better than expected; expenses OK; and credit continues to track better than expected. Obviously with Jamie Dimon’s “hurricane” 2Q22E not telling us much where we will be in 12-18 months, but so far the visible trends are generally favorable.

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