The banking sector, as a whole, has underperformed the market in 2019, and that may not be about to change.
Banks have reported mixed earnings results from Tuesday through Wednesday, but the aggregate stock move for the group has been up in the past two days. It was plus 2% at Tuesday's close, which is now helped by Bank of America's (BAC) - Get Bank of America Corporation Report 2.12% move higher after that bank beat earnings expectations.
But Goldman Sachs analysts don't think the recent slight up move reflects that investors are about to pile into the sector. "Coming into these results, we believe investors were underweight/short and the stock price move today [Tuesday] (+2% for the banks that reported vs. +1% for the S&P 500) likely speaks more to positioning than enthusiasm about the overall numbers," wrote analyst Richard Ramsden in a note out Tuesday night. That was because banks had a "low bar" for earnings expectations, as "the investor community had been bracing for weak results." The third quarter was the first one in which investors saw the recently lower interest rates put meaningful pressure on net interest margins, or the difference in interest rates at which banks borrow and lend.
While Goldman Sachs (GS) - Get Goldman Sachs Group Inc. (The) Report and Wells Fargo (WFC) - Get Wells Fargo & Company Report missed earnings estimates, JPMorgan (JPM) - Get JP Morgan Chase & Co. Report and Citigroup (C) - Get Citigroup Inc. Report beat. Largely, banks reported disappointing net interest margins. but exciting loan growth spurred by the low rates. Wells Fargo's net interest margin was 2.66% against expectations of 2.69%. JPMorgan saw 9% growth in credit cards, merchant and auto services, driven by loan growth. Also boosting results was better-than-expected fee revenue, in aggregate, with fees up 7%, largely driven by strong capital markets results.
But what lies ahead is a mixed picture. Many do not expect interest rates to move much higher, and they could even move lower. This would pinch net interest margins, a negative outcome that could easily outweigh strong loan growth. Meanwhile, some banks are expected to see net income fall year-over-year. Wells Fargo is expected to see earnings fall 12% in 2020, and JPMorgan is expecting to see a 4.8% decline. Still, many banks are expecting earnings per share to grow, as they buy stock back. On another positive note, many banks trade at roughly their book values, a low valuation, but this is put against a mixed picture going forward.
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