Earnings season kicks off this week, and whether or not the first companies to report meet expectations will set the tone for the rest of the season.
In the financial sector, the first two banks to report are JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), both of which are set to report earnings before the opening bell on Friday, April 11. Even if you don't own either stock, whatever happens is likely to move the entire sector, so it's definitely worth watching. With that in mind, here is what you should be paying attention to for clues as to how the rest of the banks are doing.
What the market is expecting
Expectations going into both banks' earnings reports are not overly optimistic. JPMorgan Chase is expected to post $1.41 earnings per share on $24.56 billion in revenue, a year-over-year decline of 11% and 5%, respectively. Wells Fargo, on the other hand, is expected to grow its earnings by 4% to $0.96 per share on a 3% decline in revenue.
The decline in revenue is no surprise, as banks have seen less lending activity as a result of rising interest rates coupled with reduced trading revenue from their investment banking divisions.
These banks' results will undoubtedly move the entire sector either up or down. However, investors in other bank stocks should pay particular attention to what is said about certain things during the conference calls.
What to watch for in each report
Wells Fargo's report could be particularly telling, because they have such a stronghold on the mortgage business. The bank is the largest mortgage originator in the U.S., and will undoubtedly have some good insights for origination and refinancing going forward. If rates continue to rise as many experts are expecting, the interest rate margin on individual loans will rise, but the banks will be originating fewer loans, and subsequently less fee income will be generated.
JPMorgan Chase is a much more diverse company, with most of its revenues split between consumer and investment banking. Basically, with JPMorgan, you should pay attention to see how their bright spots are performing. For example, when the bank reported 2013's earnings, their private banking revenue rose 11% year-over-year and their asset management business grew in size by 12%. Look for the bank to try to capitalize on the growing areas of its business.
Also in JPMorgan's case, look for the company to address the loss and shuffling of several key executives, which has been a topic of concern recently. The market may have overstated the significance of this, so I would just look for the company to put investors' minds at ease.
Management needs to make it clear that they're moving on
Both banks fared well in the recent "stress tests" and their capital plans were approved, so they can ramp up the amount of money they return to shareholders through dividends and buybacks. While the current increases are most likely factored into the share prices, both companies are now paying higher dividends than they ever were before the financial crisis, so any comments on future plans to add shareholder value would be welcome news.
It is also worth paying attention to the companies concerning recent settlements, which were substantial. However, I think the finalization of the litigation is extremely significant as it signals that both banks have truly put the crisis behind them and are ready to focus all of their resources on their core businesses.
The broad implications of the results
As I mentioned already, these companies are the trendsetters for the banking sector. Pay particular attention to areas of strength and weakness, as they tend to be similar throughout the sector. For instance, if one company's investment banking division reports disappointing bond trading numbers, odds are the banks which have yet to report their numbers have experienced similar problems. On the other hand, if the first banks to report had a fantastic quarter, you can be sure the market's expectations for the banks who report in the coming weeks will be higher.