The silhouettes of pedestrians are seen walking past a Wells Fargo & Co. bank branch at night in New York on April 11.Craig Warga/Bloomberg
The U.S. banks will be in the spotlight this week, with quarterly reports from JP Morgan Chase & Co. and Wells Fargo & Co. on Tuesday, Bank of America on Wednesday, and Goldman Sachs Group Inc .and Citigroup Inc. on Thursday.
Ahead of the first quarter results, Morgan Stanley upgraded U.S. financials to overweight.
"Financials were, for obvious reasons, a clear underperformer during the global financial crisis and again during the Eurozone sovereign crisis," writes chief U.S. equity strategist Adam Parker. "They have made up hardly any ground versus the index subsequently. However, capital bases have been rebuilt and business models changed whilst the global regulatory environment has gradually become clearer and legacy litigation expenses are perhaps receding."
A prolonged period of low interest rates is both a blessing and a curse for the banks – primarily the latter, as the flattening yield curve continues to exert pressure on net interest margins, hampering profitability.
And even if the Federal Reserve does begin to raise rates from zero, that won't necessarily provide a sizeable boost to the banks' bottom lines. A number of factors – high demand for U.S. dollar-denominated assets; higher interest rates on long-term U.S. Treasuries relative to other developed nations where monetary policy is more accommodative; scarcity of supply and excess global savings – could foster a repeat of former Fed Chairman Alan Greenspan's "conundrum" in which long-term yields fail to rise in sympathy with short-term interest rates after the commencement of a tightening cycle.
On the other hand, Barclays analyst Jason Goldberg notes that low rates are supporting the demand for mortgages. Citing data from the Mortgage Bankers Association, he shows that mortgage applications have enjoyed a strong start to the spring season, and that refinancing as a share of total applications has decreased – a sign that robust payroll growth may finally be starting to translate into more household formations. Credit conditions, meanwhile, have loosened for five straight months through March.
For Wells Fargo, which has a higher share of residential mortgage loans than any of the large-cap U.S. banks tracked by Barclays, the quarterly figures and executives' commentary on this segment will be closely tracked.
Another element to keep an eye on is whether the smaller, regional U.S. banks post superior results than their larger peers.
Weekly data on the assets and liabilities of commercial banks released by the Federal Reserve, known as the H8, shows that commercial and industrial loans rose 13 per cent in the first quarter relative to the same period in 2014. However, Bank of America Corp. analyst Erika Najarian notes that the correlation between loan growth in this segment suggested by the H8 data and the actual results from the biggest banks (those with more than $50-billion in assets) tends to break down in the first quarter.
"We favor JPM and C heading into the print given [sic] its exposure to potentially stronger capital markets revenues," Ms. Najarian writes. "The gap between large bank performance and H8 data also suggests that smaller banks are taking market share."
Regional banks, however, can also be more prone to experiencing an increase in loan loss provisions attributable to lower oil prices.
According to Deutsche Bank, the Financials are expected to grow earnings per share by 11 per cent year-over-year in the first quarter. However, stripping out Citigroup, Bank of America, and JPMorgan, the consensus call for earnings growth decreases to just 1.3 per cent.
Shareholders and analysts alike will also be focused on executives' plans to return capital after the vast majority of banks passed the Federal Reserve's annual stress test, paving the way for dividend hikes and share buybacks.