US bank stocks primed for climb on earnings

NEW YORK: Bank stocks could experience a short-term pop later this week when big names such as JPMorgan Chase, Citigroup and Wells Fargo post quarterly results, analysts said.

Banks in general have become attractively valued after a downturn in December and a selloff to start the year.

In addition, bigger banks are poised to benefit from higher interest rates while also having relatively little exposure to bad loans in the energy sector compared to smaller regional banks.

“If you were to pick a sector that is probably overdone coming into earnings season it is going to be the financials and you may see the opportunity for an upside surprise,” said Art Hogan, chief market strategist at Wunderlich Securities in New York. The options market is currently pricing in a move of 3.7 percent for JPMorgan after it reports earnings on Thursday morning, versus its average post-results move of 2.1 percent.

For Citi, the implied move is 4 percent against the 3.5 percent average while the anticipated move for Wells Fargo is 3 percent versus the 1 percent average. Those two banks report earnings on Friday.

The S&P financial index .SPSY dropped 2.4 percent in December and has followed that with a decline of more than 8 percent so far this month. That decline has helped bank stocks look cheap when compared to the broader S&P 500 .SPX.

The financial sector’s forward price-to-earnings ratio, which measures a stock’s price against its expected future earnings, now stands at 12.9 compared to the broader S&P 500’s 15.7 forward PE.

The larger banks look even cheaper, with JPMorgan selling at 9.5 times future earnings, Citigroup at 8.3 and Wells Fargo at 11.6. That could set them up for a short-term rally should earnings appease investors. Both JPMorgan and Wells Fargo shares are at least 20 percent below their 52-week highs.

While financials still are expected to be one of only four sectors to show earnings growth this quarter, according to Thomson Reuters data, those expectations have been dimming rapidly. On Jan. 1, expected growth for the sector stood at 10.9 percent, now it is at 7.2 percent, representing the largest decline in expectations among S&P sectors this year.

But that could create a lower bar for the banks to jump over and provide incentive for the stocks to rally.

One concern investors will be watching for is exposure to energy loans, which has helped to send financials lower recently as oil prices drop to lows not seen since 2003.

“You are seeing a cross-current right now between what are we going to see from rates and the benefit, and what is happening at the same time with oil and commodities falling,” said Chris Mutascio bank analyst at KBW in Baltimore.

“Does the benefit of the rate hike to revenue, is it fully, partially, or not offset at all by an increase in loan loss provision expense to account for credit quality issues in the energy portfolios?”

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