Bearish On Upcoming Banking Earnings? Bet On These ETFs

The financial sector has been in a tight spot this year despite a Fed lift-off last December. Global growth worries prevalent for the most part of 1H16 and Brexit shockers actually bumped up demand for safe-haven assets like Treasury bonds, pushing bond yields down to record lows this month. Needless to say, this kind of an interest rates’ backdrop would hurt banks’ profitability in the Q2 earnings season by shrinking net interest margin.

Inside Likely Banking Earnings Blues

Most central banks across the developed region that were already accommodative are now mulling over more stimulus measures to wait out the intense Brexit upshot. Even the Fed, which was turning hawkish, got back its good old dovish tone to address global market threats and moderation in U.S. growth.

As a result, reduced capital market activity and risk-off trade sentiments are likely to weigh on investment banking activities and trading revenues. Big banks are likely to be more hurt than regional banks as the former has greater exposure to ailing foreign economies.

As noted in a Wall Street Journal article, “higher lending profit and stable fee income will lift earnings at regional U.S. banks about 2% in the second quarter from a year earlier” per an analyst. But the KBW Nasdaq Bank Index, consisting of bigger banks, is expected to see an average earnings reduction of 0.9% in Q2, as per FactSet data.

Moreover, U.S. banks’ operations are highly dependent on Britain. And earnings of large U.S. banks could be down by 5.6% this year and as much as 9% next year on Brexit, as per Keefe, Bruyette & Woods (read: 6 Sector ETFs Threatened by Brexit Uncertainty).

Below we highlight earnings surprise predictions of big banks, compiled by Zacks, which are scheduled to report soon and see how things are shaping up numerically prior to their earnings releases.

Inside Surprise Prediction

JPMorgan Chase & Co. (JPM - Analyst Report) has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%, at the time of writing. Our proven model does not conclusively show that JP Morgan is likely to beat on earnings since a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen. Further, the stock has an unfavorable VGM score of F. The company is expected to report on July 14.

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