Bank stocks blew up in 2012, with the financial sector performing better than any other industry. Driven by a recovery in the housing market, and subsequently mortgage lending, JPMorgan Chase (NYSE:JPM) tacked on about 35% in calendar 2012, Citigroup (NYSE:C) jumped over 55% and Bank of America (NYSE:BAC) more than doubled.
But as we face a very important week of earnings, kicking off tomorrow morning, what’s next for banks?
And more importantly, what will bank earnings say about the market?
The Bad News
Not Much Growth: Broadly speaking, earnings for the quarter are expected to be disappointing. For instance, earnings in the financial sector should increase a meager 2.9% on average, according to recent data from FactSet. That happens to be the second best of all 10 S&P 500 sectors … but hardly something to set off fireworks over.
Waning Mortgage Momentum: Broadly, recent reports indicate over 20% of S&P 500 companies have lowered their estimates for earnings. This trend is mirrored in banks, as the initial pop in mortgage origination has slowed and analysts are getting more cautious on the sector’s earnings potential.
Continued Interest Pressure: Efficiency remains the name of the game for big U.S. banks, as low rates continue to pressure net interest income. Citi, Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) announced even more layoffs in the past few months, but there is only so much efficiency that bank stocks can gain. Eventually, there has to be growth in the top line.
The Good News
Recovery Hopes: Continued economic recovery is not just boosting the mortgage business and housing market, but overall business and consumer lending. For instance, we just learned that Q4 small-business lending was the highest since early 2010, when the FDIC started tracking this specific data set — a good sign for banks. If that continued in Q1, too, it could be very bullish.
Mortgage Settlements: Some of the overhang from crisis-era foreclosure tactics and subprime lending have been quelled with recent resolutions, including a $700 million deal from Citigroup and a broader $25 billion mortgage settlement package. That should help take some of the uncertainty out of the picture for investors and help banks move on from a very dark period in their history.
Buybacks: According to Federal Reserve “stress tests” and regulator-approved buyback plans, the 17 largest bank stocks will spend 32% of their earnings on average to repurchase stock through Q1 2014. That’s up from 25% of earnings last year. Though those buybacks obviously won’t hit Q1 numbers, any modest earnings improvement going into this massive buyback period could result in big-time momentum going forward.
Pay close attention to the week ahead, particularly these financial stocks reporting earnings as soon as tomorrow:
- JPMorgan (NYSE:JPM): Friday, April 12
- Wells Fargo (NYSE:WFC): Friday, April 12
- Citigroup (NYSE:C): Monday, April 15
- Goldman Sachs (NYSE:GS): Tuesday, April 16
- Bank of America (NYSE:BAC): Wednesday, April 17
- American Express (NYSE:AXP): Wednesday, April 17
- Morgan Stanley (NYSE:MS): Thursday, April 18
- 10 things to look for in Q1 bank earnings. (MarketWatch)
- FBR Capital says you should expect bank headwinds in Q1 numbers. (The Street)
- What’s in store for regional banks? (CNBC)
- More broadly, just how low is the bar for Q1 earnings? (Market Montage)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.