A lot happened in the second quarter that led analysts to drop their expectations for bank earnings. The lowered bar was, in turn, cleared by five out of the nation's six largest banks. To hear more about how banks fared in the quarter, listen in below to this segment from Industry Focus: Financials, The Motley Fool's podcast focusing on a different industry each day.
A full transcript follows the video.
This podcast was recorded on July 25, 2016.
Gaby Lapera: It's the end of the quarter, beginning of a new quarter. It's time to do bank earnings, because this is a financial show and that's what we do. Generally, pretty great quarter for banks.
John Maxfield: Yeah, here's the thing. If you look at it from a fundamental perspective, not a blowout quarter, right? It's not like these banks are reporting record earnings. However, when you think about what impacts stock prices, they did actually have a really good quarter, so what impacts stock prices are how a bank performs relative to analysts' expectations. If we're just talking about the top six banks, so JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley, five out of six of those banks turned in earnings per share that were better than what analysts expected. The one exception is Wells Fargo, which is ironic because Wells Fargo, if you look back at its historical quarterly performance, it almost never misses expectations, but it came in at 1.01 cents a share, which is right where analysts expected it to be, so it's not like it was a bad quarter, but not an amazing quarter.
Lapera: I have a question for you. How do analysts come up with their expectations?
Maxfield: That's a great questions. What they do is they have models that model for differences, things that impact bank profitability, both the top and the bottom line, and then they just project those models into the future, depending on what interest rates did over a quarter, whether there were legal settlements for a particular bank in a quarter, things like that.
Lapera: Yeah, so one of the things that analysts can do and occasionally do is they will modify their expectations for how they think a company will do in a middle of a quarter, based on new information, which is part of the reason that banks did so well this quarter, is because bank analysts decided that they should lower expectations, mostly because of Brexit.
Maxfield: That's exactly right. If you go back over the past three months... and you can see there's a lot of websites online that showed the direction of analysts' expectations and how they adjusted those... Basically over the past three months, leading up to the end of the second quarter, analysts had consistently reduced their expectations for bank's profits on an earnings per share basis. The principle reason was we had the Brexit vote on June 23rd, where the United Kingdom was trying to determine whether or not it wanted to separate from the European Union, which we discussed on the show. Obviously, it came out the vote in favor of separating from the European Union. Even on top of that, and we saw this in the first quarter, you have concerns about moderating growth in China. You have concerns about what will happen to bank loan portfolios in the energy sector as a result of these low oil prices. All of these things cause the analysts to back off their earnings expectations for these banks.
Lapera: It's one of those things where the bar was set low, but still a good job to banks for doing better than expected.
Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.