JPMorgan Chase & Co. (NYSE: JPM),
Wells Fargo & Co (NYSE: WFC) and
Citigroup Inc (NYSE: C) report second-quarter
results before market open Friday, July 14. After last year’s post-election rally, these stocks and others in the financial
sector have been on more of a roller coaster ride so far this year.
Over the past several weeks, bank stocks rallied following the House’s proposal to roll back the Dodd-Frank Act and on results
of the Fed’s stress test—a yearly examination to ensure the nation’s largest banks have enough capital to weather a financial
crisis and still be able to lend to consumers and businesses.
All of the banks tested passed this year, the first time that’s happened in seven years. Following the positive outcome, banks
publicly released their capital plans, with some of the biggest banks announcing dividend hikes of a few percent to as much as
doubling payouts, and plans to repurchase more than $10 billion of common stock over the next year.
In addition to the stress tests, another area of focus for banks has been the Fed’s rate hikes and how they plan to go about
reducing their $4.5 trillion balance sheet. A lot of uncertainty regarding rate hikes diminished this year when the Fed announced
plans to increase their benchmark rate once more in 2017, and attention shifted towards the Fed’s plans to unwind assets as well as
the European Central Bank’s monetary policies.
As this year progressed, the yield curve flattened to almost 10-year lows according to Reuters. If the spread between long-term
and short-term interest rates continues to shrink it could pressure earnings in the sector because banks tend to borrow in the
short-term and lend to consumers and businesses over longer periods of time (mortgages, long-term company debt, etc.) Despite the
Fed’s rate hikes, banks have kept depositor rates low, which could help boost net interest income—the difference between revenue
the bank generates from assets and the expenses associated with paying its liabilities
Today, Fed Chair Janet Yellen is scheduled to speak with the House Financial Services Committee as well as answer their
questions, which could possibly provide additional insight into the Fed’s plans. There’s been a divide in Congress over the
approach to hiking rates and unwinding the balance sheet, with concerns that if they move too fast it could impact the sluggish
economic recovery.
JP Morgan Chase Q2 Earnings and Trading Activity
If you’re interested in learning more about what’s happening in the global economy, consider listening to JPM’s earnings
conference call. Due to the size and scope of its business, CEO Jamie Dimon often discusses macroeconomic factors impacting markets
across the world.
For the quarter, JPM is expected to report earnings of $1.57 per share, up two cents from the same quarter last year, on revenue
of $24.8 billion, according to third-party consensus analyst estimates. Revenues are expected to decline 1.5% compared to Q2 2016.
Last quarter the bank’s trading revenues increased, partially due to heightened volatility in markets.
As volatility diminished in recent months, several companies including Bank of America Corp (NYSE: BAC), Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS), and JPM announced they’ve experienced weakness in fixed income, currencies and
commodities (FICC) trading as well as equities trading, and expect revenues from those divisions to decline this quarter.
The options market has priced in just under a 2% potential stock move in either direction around the earnings release, according
to the Market Maker Move indicator on the thinkorswim® platform. At the July 14 weekly
expiration, options activity for calls has been the heaviest at the 93 strike price, but there’s been a decent amount of volume at
the 94 and 95 strikes as well. Puts have been active at the 91 and 91.5 strikes, which is where the stock is coming from after its
recent increases. As of this morning, implied volatility is at the 33rd percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over
a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined
price over a set period of time.
FIGURE 1: BANKS RALLY IN JUNE. JPM (blue line), WFC (purple line) and Citigroup’s (teal line) year-to-date performance as of
this morning is charted above on the thinkorswim® platform by
TD Ameritrade. The banks gave up their gains halfway through the year, but started rallying again at the beginning of
June. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not
guarantee future results.
Wells Fargo Q2 Earnings and Trading Activity
In recent news, a federal judge granted preliminary approval for WFC’s $142 million class action settlement with customers who
had fake accounts created in their names. In a statement, CEO Tim Sloan called the ruling “a major milestone in our efforts to make
things right for our customers.” The scandal has weighed on the bank for several quarters now.
When WFC releases results, it’s expected to report earnings of $1.02 per share, up one cent from the same quarter last year, on
revenue of $22.3 billion, roughly flat to last year, according to third-party consensus analyst estimates.
In options activity, traders have priced in just over a 1.5% potential stock move in either direction around the earnings
release, according to the Market Maker Move. At the July 14 weekly expiration, options activity for calls has been pretty light and
spread out across strike prices, while puts have been active at the 54.5 and 55 strikes. As of this morning, implied volatility is
at the 42nd percentile.
Citigroup Q2 Earnings and Trading Activity
For second-quarter earnings, C is expected to report earnings of $1.21 per share, three cents below Q2 2016’s earnings, on
revenue of $17.3 billion, down just over 1% compared to the same period last year, according to third-party consensus analyst
estimates.
Like the other banks mentioned above, C has indicated it expects trading revenues to decline this quarter. At Morgan Stanley’s
financial conference, CFO John Gerspach said “Volatility has been very low this quarter, which has certainly led to somewhat of a
softer trading environment, especially in the fixed income and equity markets.”
Options traders have priced in just over a 2% potential stock move in either direction around the earnings release, according to
the Market Maker Move. At the July 14 weekly expiration, options activity for calls has been active at the 67 and 69 strike prices,
while puts have been active at the 64.5 and 66.5 strikes. As of this morning, implied volatility is at the
32ndpercentile.
Looking Ahead
This is the first round of big bank earnings, with Bank of America (BAC) and Goldman Sachs (GS) reporting second-quarter results
before market open on July 18, and Morgan Stanley (MS) on July 19 before market open. Traders will likely be keeping an eye on
Janet Yellen’s congressional testimony today for additional information on the Fed’s future plans.
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