Bank Stocks Retreat From Rally on Doubt Profit Boom to Last

(Bloomberg) — After soaring during the first half of the year, U.S. bank stocks have been under pressure ahead of second-quarter earnings reports on speculation that the results won’t be strong enough to justify the heady run up.

The S&P 500 Banks Index, which has been one of the best performing segments this year, has slumped more than 6% over the past five weeks even as the broader market advanced.

The pullback began in early June after JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon signaled that the pandemic era trading boom could be drawing to a close, indicating that revenue from that business would drop in the second quarter by more than previously expected. Executives from Citigroup Inc. and Morgan Stanley also sought to temper expectations in recent weeks.

“Investors have begun questioning whether all the good news is currently priced in, which we believe contributed to banks’ underperformance,” Raymond James analysts including David Feaste wrote in a note.

Read more: Banks in U.S. Poised for Weaker Results After Pandemic Windfall

The effort to manage down expectations came as the S&P bank index surged 28% during the first half of the year, almost twice as much as the climb in the S&P 500 Index, with the financial system awash in cash and investors pouring into stocks of companies that stood to gain from the economic recovery.

That’s left analysts preparing for a weaker showing, with the combined revenue at the six largest banks expected to fall about 5% versus the same period last year, according to data compiled by Bloomberg.

The earnings reports, however, could be offset in part by the surge of cash banks have been sitting on that may start flowing back to investors.

With the exception of Citigroup, each of the other five major U.S. banks announced that they would be hiking their quarterly dividend after passing the Federal Reserve’s stress test. And share buybacks could also “temper stock reactions to potential misses,” according to BMO Capital Markets analyst James Fotheringham.

Some of the cash may be freed up to make loans. After setting aside $35 billion last year to cover possible losses triggered by the pandemic, the lenders are expected to continue releasing reserves including about $1 billion combined from JPMorgan, Bank of America Corp. and Wells Fargo & Co. alone.

“Although investors won’t pay-up for releasing reserves, it provides an earnings benefit to fund either loan growth or accelerate share buybacks,” said Wedbush analyst David Chiaverini.

Read more: Three U.S. Banks Seen Splitting $1 Billion Reserve-Release Boon

Here’s what analysts are saying about the biggest U.S. banks ahead of their earnings this week:

JPMorgan Chase & Co.

The second-quarter earnings season will kick off Tuesday morning with the release of JPMorgan’s results at 7:00 a.m. in New York. Shares of the largest U.S. bank have climbed more than 24% so far this year but trail all except Citigroup in terms of performance among the six largest lenders.

Jefferies (Daniel T. Fannon, buy): “A rising contribution from more durable revenue streams and more efficient internal capital allocation should drive sustainably higher returns and multiple expansion.”“While the 1Q21 ROTE of 33% is unsustainable, a longer-term path towards sustainably higher returns is underway.”

Goldman Sachs Group Inc.

The bank will announce its second-quarter earnings at 7:30 a.m. in New York, about 30 minutes after JPMorgan. Goldman’s shares have surged 44% year to date and lag just Wells Fargo in terms of returns.

Credit Suisse (Susan Roth Katzke, outperform): “We expect constructive commentary with respect to the banking pipeline and the level of strategic dialogue in particular, confidence in the health of trading markets and the sustainability of market share gains, and incremental support from asset management inflows and fundraising, all of which support the forward look.”

Bank of America Corp.

Wednesday’s earnings flurry will commence with Bank of America releasing its results at 6:45 a.m. in New York. The lender has seen its shares rise 34% in 2021, putting it on pace for its biggest annual increase since 2019.

Morgan Stanley (Betsy L. Graseck, underweight): “Given the flatter forward curve today vs April and weaker loan growth, we think BAC will lower NII guidance at earnings.”“BAC is one of the most rate sensitive names in the group, and the forward NII guide will likely drive the stock on earnings day.”

Citigroup Inc.

Little more than an hour after BofA’s release, Citi will announce its second quarter earnings at 8:00 a.m. in New York. Shares of the bank have gained just over 12% so far this year, making it the worst performing of the six biggest lenders in the U.S.

BMO Capital Market (James Fotheringham, outperform): “We recommend C shares as our top pick among large-cap banks on valuation, with shares trading at the largest discount (by far) to its pro forma TCE among the big banks.”

Wells Fargo & Co.

Capping off Wednesday’s results will be Wells Fargo, with its results being released at 8:00 a.m. in New York. The bank has been the best performer among the big six, jumping 46% since the start of the year.

Baird (David George, outperfrom): “Expectations remain low but we believe the company’s franchise value remains intact despite near-term struggles, and valuation appears attractive at ~1.3x TBV given WFC’s unique opportunity to improve returns with the strategic reorganization.”

Morgan Stanley

Rounding out the busy week of earnings for the biggest U.S. banks, Morgan Stanley will announced its results Thursday morning at 7:30 a.m. in New York. Shares of the firm have gained about 35% since the beginning of the year and are near the record high reached in early June.

Evercore ISI (Glenn Schorr, outperform): “MS has been a great stock but we think there’s still plenty left in the tank as organic growth and markets continue to produce a very favorable shift in the business mix.”

(Updates stock prices throughout.)

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