Thursday's Market Minute: Earnings Guide: Financials

Earnings season is upon us, and the one sector that will be in the spotlight more than any other this time around is financials. Not surprising. After 3 banks failed over the last month, the market has begun to question the stability of the banking system. This earnings season, the reports will be complex, and when I say “complex”, I mean there will be some nuances that you should keep in mind. Looking at just the revenue and earnings per share results can and will be deceiving, so here is a guide to help you out.

Provisions for Credit Losses will be the highlight of each financial institution and can drastically impact reported earnings. This line item is cash that is set aside by a financial institution in the event that borrowers are unable to pay back existing loans. Each financial institutional may label it differently. For instance, Citigroup labels this provision as Allowance for Credit Losses (ACL). Although these “losses” are not realized in a sense, accounting rules require to have them listed on the Income Statement as an expense which could dramatically distort the earnings-per-share result to the downside. It does not necessarily mean the financial institution is underperforming, but usually when the adjusted earnings-per-share metric is reported it creates a short-term shock for investors. The other side of this is also true. If the financial institution no longer needs to set aside cash for potential losses on credit, it is then added back to the income statement, causing once again a distorted result in the form of gains. Here are some financial institutions reporting on Friday and what to keep an eye out for.

1Q Estimates (Earnings Whisper)

JPMorgan Chase (JPM) 

Revenue Est: $36.04B

Adj EPS Est: $3.44 

JPMorgan could benefit from the deposit flight away from community and regional banks. The bank’s business units are well-diversified, which some investors see as a benefit, but that also allows them to have exposure to other areas of the market that have seen some recent softening, especially on the global stage.

Citigroup (C)

Revenue Est: $20.08B

Adj EPS Est: $1.66 

Citigroup has drastically reduced its global exposure and has focused more on institutional services, which is most of their revenue mix. This transition has been a long one and the stock has reflected the pains of adjustment. The key area to watch out for will be their trade desk operations. Typically, volatility brings strong results for this business segment and may offset losses from other business units that are still feeling the impact of the changing macro-economic landscape.

Wells Fargo (WFC)

Revenue Est: $20.14B 

Adj EPS Est: $1.16 

The recent announcement from Wells Fargo around reducing its mortgage servicing portfolio was well received by the markets. Their primary source of income comes from the Consumer and Small Business Banking segment. This will be the focus for their earnings announcement as it has been directly impacted by the recent “mini banking crisis.” Margins within this business may have contracted and the market is expecting a larger increase in Provision for Credit Losses due to their portfolio mix.

PNC Financial Services (PNC)

Revenue Est: $5.62B

Adj EPS Est:$3.60 

PNC has been labeled a “super regional” bank that focuses more on traditional lending and cash management operations. The deposit mix is split between consumer and commercial customers, but their loan portfolio is weighted more towards commercial. Last week, the Federal Reserve reported commercial and industrial loans saw the largest week-over-week decline since it has been tracked. PNC will be able to speak directly to this trend and how it may impact the near term.

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