US banks Q3 earnings preview: Loan growth, deal making in focus

Banks have booked strong gains this year. What comes next depends on Q3 earnings and whether lending is finally showing signs of picking up.

Q3 US banks earnings

Banking stocks have booked strong gains across the year so far, significantly outperforming the S&P. Whether the stocks can extend these gains further depends on what Q3 earnings tell us.

What to watch:

Loan growth

The prospect of the Fed moving to raise interest rates sooner rather than later has been an closely watched by the markets. A hike in rates would be good news for Net Interest Income at the banks. Such as move would widen NII margin, helping to explain why the banks have outpaced the broader market. However, with corporations issuing bonds and consumers making the most of their stimulus money to pay down credit cards, banks have struggled to grow lending.

Capital Market performance

Capital market underwriting, a boom in merger and acquisitions and record-breaking deal making is expected to boost revenue streams in those banks which dominate this areas namely, JP Morgan and Goldman Sachs.

EPS

Across the pandemic banks wrote off huge sums for bad loans reserves. Bad loans never materialized to the extent that was initially forecast thanks to fiscal and monetary support. Last quarter the banks released some of these reserves, inflating earnings. This is could well happen again this quarter.

 

Take a closer look:

JP Morgan Chase – October 13th

Back in Q2 JPM beat forecasts for both revenue and profits. However, it was still waiting for loan growth to show meaningful signs of recovery, a pretty important point for the US’s largest lender. The bank also cut its NII guidance, yet investment banking had a record quarter. Investors will be looking to see whether investment banking remains red hot and whether there are stronger signs of growth from loan growth & NII. Its diversification and solid track record stand it in good stead. Expectations are for EPS of $2.99 on revenue of $29.7 billion. The whisper number is $3.19.

 Where next for JP Morgan share price?

JP Morgan rallied at the start of the year but has remained relatively range bound across most of 2021. The price has been capped on the downside by 145 and on the upside by $165. The price has recently broken out to the upside with buyers targeting fresh all time highs. The RSI is supportive of further gains whilst it remains out of overbought territory. It would take a move below $160 to negate the near term up trend.

JP Morgan chart

Wells Fargo -October 14th

Wells Fargo has underperformed its peers over the past several years. This is the bank which is most sensitive to interest rates. This is also the top performing bank so far this year trading up 59% year to date.  However, results are likely to be influenced by how much it is spending to comply with orders from regulators to improve risk and control systems. Expectations are for EPS of $1.04 on revenue of $18.46 billion. The whisper number is $1.04.

Where next for Wells Fargo share price?

Wells Fargo share price trades in an uptrend, above its ascending trendline dating back to November last year. The recent retaking of the 50 sma combined with a bullish RSI is keeping the buyers optimistic of further gains. A move above $49.85 could bring $51.40 back into play and fresh all-time highs. It would take a move below $43.46 for the sellers to gain momentum towards the 200 sma at $41.91.

Wells Fargo chart

Bank of America – October 14th

Bank of America is also well positioned to benefit from rising interest rates. Lending will be a key focus after lending stalled in Q2 amid low interest rates and a shrinking loan book. The bank’s expected 35% jump in profits could well be driven by smaller provisions for bad loans and a rise in NII. The share price has risen 46% so far this year. Expectations are for EPS of $0.70 on revenue of $21.66 billion. The whisper number is $0.82.

Where next for Bank of America share price?

After a strong run up at the start of the year the Bank of America share price consolidated across Q2 and Q3 in a holding pattern capped on the upside by $43.50 and on the downside by $37.50. Just recently the price has broken out to the upside trading at 13 year highs. Upbeat numbers and guidance could see $50 the round number and a level last seen in 2007 come into target. Meanwhile it would take a move below $41.20 the 50 sma to negate the near-term uptrend. Whilst a move below $37.50 could see the sellers gain traction.

 

Bank of America Chart

Citigroup - October 14th

Citigroup share price has underperformed its banking peers rising just 20% year to date. Although that is still outperforming the wider S&P. This year saw Jane Fraser become the first female CEO of Citigroup and the transition of management could be good news. Any updates on strategic positioning will be in focus in addition to loan book growth, particularly following the decline in revenue reported in Q2. Citigroup reported a 12% slide in total revenue in Q2 and loans were down 3% from a year earlier. Investors will be hoping to see an improvement here. Expectations are for EPS of $1.73 on revenue of $17.01 billion. The whisper number is $2.14.

Where next for Citigroup share price?

The share price has been trending around $70 across the past 4 months. More recently after rebounding off $66 the September low the Citigroup share price has been extending gains above the 50 and 200 sma. The RSI is mildly bullish. Buyers could look for a move over $74.75 to target $80. A move below the 200 sma at $70 could prompt a deeper sell off towards $66 the September low.

Citigroup chart

Goldman Sachs - October 15th

Goldman Sach is expected to benefit from an increase in merger and acquisition fees amid the biggest global deals boom on record. Global M&A hit an all-time peak in Q3 as cheap financing drove desire for deals. Expectations are for EPS of $9.70 on revenue of $11.52 billion. The whisper number of $12.34.

Where next for Goldman Sachs share price?

The Goldman Sachs share price is attempting to retake the 50 sma after a double bottom at 370. A move above the 50 sma and $404 horizontal resistance could prompt further gains towards $420 and fresh all time highs.  A move below $370 could see the sellers gain traction towards the 200 sma at $350.

Goldman Sachs chart

 

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