Looking Ahead To Big Banks' Q1 Earnings

The large money-center banks that will kick-off the 2021 Q1 earnings season for the sector have enjoyed an amazing run this year, with these stocks handily outperforming not only the broader market but also many of last year’s hot stocks.

You can see this in the chart below that plots the year-to-date performance of JPMorgan (JPM - Free Reportand Wells Fargo (WFC - Free Report), which will report March-quarter results before the market opens on Wednesday, April 14th — relative to the S&P 500 index.

We added Tesla (TSLA - Free Reportto the chart to give you a sense of this year’s changed market dynamics that have shifted in favor of these bank stocks at the expense of last year’s favorites.

We don’t envision seeing a ton of improvement in banks’ Q1 numbers relative to the stabilizing trend we saw in the group’s preceding quarter’s results (2020 Q4) when revenue weakness from soft loan demand and weak net interest margins was partly offset by loan-loss reserve releases, effective cost controls and continued momentum in the capital markets business.

We expect continued momentum along the trends set in 2020 Q4, with the core banking business still reporting weak loan demand and margin pressures relative to the year-earlier period. The sharp rise in interest rates in Q1 – the benchmark 10-year Treasury bond yield jumped from 0.91% at the start of January to 1.74% on March 31st – will not have much of bearing on the group’s March-quarter numbers, but has nevertheless been the single most important catalyst in changing the market’s view of these stocks.

We should see further reserve releases from the group in the Q1 reports, along the lines of what we saw in the preceding period, a trend that we believe will remain in place in the coming quarters as well.

While we don’t expect much on the core banking side, we do expect blockbuster numbers in the capital markets business, particularly on the investment banking side. The first quarter of 2021 witnessed record investment banking activity levels, with both equity underwriting and M&A volumes not only up from the preceding period’s (2020 Q4) strong pace, but significantly above the year-earlier level.

These banks are big beneficiaries of the mushroom growth in the SPAC space, which have started easing a bit lately but remained very strong in Q1. With respect to trading volumes, the year-earlier period saw a huge spike in March 2020 as Covid lockdowns took effect, which will make the year-over-year comparisons relatively tougher. But overall volumes should remain elevated by historical periods.

As such, the overall set up for bank earnings remains positive, with the market likely looking past Q1 results. For the Zacks Major Banks industry, which includes these major banks and account for roughly 45% of the Finance sector’s earnings, Q1 earnings are expected to be up +85.5% on -2.7% lower revenues.

This would follow +4.1% earnings growth on -4% lower revenues in the preceding period. Easy comparisons to the year-earlier period, when the banks booked huge loan-loss reserves, is the biggest driver of the +85.5% year-over-year earnings growth for the group.

For the Finance sector as a whole, total Q1 earnings are expected to be up 51.5% on +2.3% higher revenues.

The chart below shows Q4 expectations for the Finance sector’s constituent industries in the context of what these industries reported in 2020 Q4 and what is expected for 2021 Q2 when the comparisons ease further.

The market knows that the eye-popping earnings growth pace for the group is mostly due to easy comparisons. The group’s recent stock market momentum reflects the market’s macro expectations for the coming quarters and not any optimism about banks’ Q1 results. As such, we wouldn’t expect this recent favorable trend to reverse course in response to quarterly results unless management teams paint a downbeat outlook.

Overall Expectations for 2021 Q1

As we have been regularly pointing out, estimates for Q1 and beyond have been steadily going up and currently show +20.4% earnings growth on +5.6% higher revenues from the year-earlier period.

Part of the strong growth in Q1 is reflective of easy comparisons, as the last month of 2020 Q1 was weighed down by the pandemic, though the full impact showed up in Q2. Those easy comparisons are notable for the Finance, Consumer Discretionary, Transportation, and Energy sectors. Profitability in these sectors is notably above the Covid-hit levels of the year-earlier period, but they are still below the comparable period in 2019 (2019 Q1), except for the Finance sector.

But it isn’t just easy comparisons that is giving us the strong aggregate growth in 2021 Q1. A number of sectors, including the all-important Technology, are on track to produce genuine growth, i.e., 2021 Q1 profitability growth above pre-Covid levels. These include, in addition to Technology (+26.9% above 2019 Q1 level), Construction (+55.6%), Medical (+27.3%), Basic Materials (+13.1%), Consumer Staples (+10.8%) and Utilities (+9.6%).

The Finance sector is benefiting from easy comparisons to the year-earlier period, but 2021 Q1 earnings are now expected to be +2.3% above the 2019 Q1 level.

Earnings Season Never Ends

The Q1 earnings season will really get going in the coming week when the big banks come out with their March-quarter results on April 14th. But not all companies have fiscal quarters that correspond ‘cleanly’ with the calendar periods.

For example, there are almost two dozen S&P 500 members that have fiscal quarters that ended in February, and 21 such companies — including FedEx (FDX - Free Report)Nike (NKE - Free Report)Costco (COST - Free Report), and others — have reported their fiscal February-ending quarterly results already. We and other data aggregators cull the results from these 21 index members as part of our 2021 Q1 tally.

We have a total of 45 companies on deck to report results the week of April 12, including 21 S&P 500 members. Aside from the aforementioned major banks, this week’s lineup includes a host of major regional banks and a few bellwether players from other spaces, like Delta Airlines (DAL - Free Reportand Fastenal (FAST - Free Report).

The table below shows a summary of expectations for 2021 Q1, contrasted with what was actually achieved in 2020 Q4:

The chart below takes a big-picture view of the quarters, showing Q1 earnings and revenue growth highlighted and shown in the context of what was actually achieved in the last few quarters and what is expected in the coming periods:

The chart below shows quarterly earnings totals or quarterly aggregate net income, instead of year-over-year growth rates. This gives us a better appreciation of the pandemic’s earnings impact and the resulting easy comparisons that are helping the growth rate in Q1 (and even ‘bigly’ in Q2):

The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +25.4% and +8.2%, respectively, which follows the Covid-driven decline of -13.1% in 2020.

On an index ‘EPS’ basis, the 2021 expectation works out to $170.32, up from $135.80 per ‘Index share’ in 2020.

These full-year estimates have been going up as well, as the chart below shows:

We envision this favorable revisions trend to accelerate over the next few months as the vaccination effort reaches a critical mass and greater ‘normalcy’ returns to life.

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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William K. 3 years ago Member's comment

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Leslie Miriam 3 years ago Member's comment

Money can't buy love!

Gil Richards 3 years ago Member's comment

Maybe, but it can buy everything else!

William K. 3 years ago Member's comment

Can't buy poverty, and it can only RENT "friends."