Earnings Season Has Arrived -- Here's What to Watch

Check out all our earnings call transcripts.

The big U.S. banks are set to kick off earnings season this week -- in fact, the numbers have already started to trickle out with Citigroup's (C 1.41%) results reported on Monday morning.

In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what we know so far and what we'll be watching in the days ahead.

A full transcript follows the video.

This video was recorded on Jan. 14, 2018.

Jason Moser: Let's talk about what we're going to be watching this week. Every week, we have One to Watch for our listeners, and we give them stock ideas that are on our radar. But with earnings season getting underway here, we thought really, we should have five ones to watch this week, talking about all of these banks that have earnings coming out.

Citigroup earnings just came out today, on Monday. We have JPMorgan and Wells Fargo earnings tomorrow on Tuesday. On Wednesday, we have Goldman Sachs and Bank of America reporting. So we thought it would be a good idea to get all of these companies on investors' radars. Maybe pick one or two of these banks that you really have your eye on, and some of the things you might be looking for.

Matt Frankel: Sure. First, a couple of the trends I saw on Citigroup's earnings that could kind of set the tone. Citigroup's trading revenue was terrible. The bank had already lowered its expectations for the year, and it failed to even meet those lower expectations. Generally, that would cause the stock to tank afterwards. That was Goldman's original downward catalyst last quarter. But Citi posted some pretty good metrics otherwise. They beat earnings. Their efficiency was better than expected. They cut costs by 4% year over year, which in the banking business is pretty good, especially when you're growing revenue. So the picture looked pretty good. Citi might be one to watch in the coming quarter. They're not looking quite as bad as they were a few years ago.

But, playing off of that, trading revenue is definitely an area to watch, especially with the banks that really depend on it like Goldman Sachs, Morgan Stanley, Bank of America has some trading revenue. Trading is definitely one thing to watch.

Another thing I'm watching is buybacks. You're not going to hear too much about new dividends or buybacks being announced just because, for the financials, that happens midyear when the stress test results come out. But we all know that stocks tanked during the fourth quarter. A lot of these banks had $10 billion or more in available buyback capital. Wells Fargo especially had a massive buyback authorization. I want to say it was over $20 billion for the year.

Moser: That's a good point. I'd be curious to see how opportunistic these teams are.

Frankel: Right? I would love to have seen Goldman buy back a ton of its stock below book value, or Wells Fargo when the court of public opinion turned against it. So that's one thing I'm watching, definitely.

Goldman I especially have my eye on because they're going through their Malaysian crisis right now. They had a bond fund that went bad. Malaysia is trying to get $7.5 billion out of them, which is really what's holding their stock down, the uncertainty having to do with that. Not only is Malaysia trying to get money out of them, but there could be a ton of regulatory risk right here at home.

Moser: Oh, you have to believe.

Frankel: So Goldman could be facing some pretty stiff penalties. I don't think they're going to throw the book at them, but you never know. The uncertainty is what's bothering everybody right now. So that's one I'm keeping an eye on. They obviously can't say too much for an ongoing investigation, but definitely one to keep an eye on.

Moser: Yeah, I think that's the biggest challenge with these big banks, is that in many cases, they can be black boxes. It's difficult to fully understand their reach and the things that they have hiding on the balance sheet here and there.

Frankel: That's true of any highly regulated business like that.

Moser: That's a good point. I'm glad you said it. It's something that's not really specific to one company. It's more sector-specific and they all have to deal with it. It's worth knowing. I guess there are some banks out there that behave better than others. But, yeah, it's a risk you have to worry about for the entire sector.

I always feel like the smaller banks are more understandable. That's why I tend to steer toward looking at them more. I feel like you can understand a little bit more of what they're doing. But those small banks are still trying to get big, so at some point or another...

Frankel: Especially the ones without a big trading operation or trading revenues. Really tough to understand or predict, especially. There are so many different dynamics that go into fixed income trading. We could dedicate a series of shows just to that, if we wanted to.

Moser: Maybe we will.

Frankel: We tried to fit trading revenue into an episode last year. I gave an overview, but there's only so much you can do.

Moser: Yeah, I guess so.

Frankel: It's really hard to predict because it has to do with market volatility. And because it's so regulated, they can't tell you what's going on in the meantime.

Moser: That's a good point.

Frankel: That's why you generally always get a surprise when it comes to trading revenue, whether it's a good surprise or a bad surprise.

Moser: Well, I guess we'll find out more the rest of this week, and more as earnings season starts picking up steam here. I'm excited about that. I always enjoy earnings season. It gives us plenty of stuff to talk about on these shows.