Friday, 13 January marks the start of the Q4 2022 earnings season. First up will be reports from banks including JPMorgan (JPMorgan), Bank of America (BankofUS) and BlackRock (BlackRock). It seems that in an environment of rising interest rates, the banking sector is not doing so well. But will it surprise analysts on Friday and, if so, which companies could be the biggest surprise?
Situation in the banking market
The Financial Select Sector SPDR Fund (XLF), which tracks financial sector quotes, is down 34% since the start of last year. In the same period, we have seen seven interest rate hikes in the US, up to a peak of 4.5%. According to the FedWatch website, which collects analysts' forecasts of future interest rates, as many as 79% of analysts assume that interest rates could rise by 0.25 percentage points in February. Most of those surveyed assume that we could see the first rate cuts in September this year.
Source: Conotoxia MT5, XLY, Daily
A rise in interest rates could positively affect the banking sector in several ways. Firstly, banks make money from the difference between the interest rates they offer customers on loans and the interest rates at which they borrow money from other banks or the government. Rising interest rates mean that banks can offer higher interest rates on deposits, allowing them to raise more money from customers. Secondly, banks can earn more from credit spreads (i.e. the difference between the interest rate at which a bank borrows money and the interest rate at which it lends) because they can raise interest rates on loans to customers. Thirdly, rising interest rates help to increase banks' investment returns, as it could be more profitable to invest in debt instruments with higher interest rates.
The downside to this kind of situation may be a reduced willingness to take out new loans at a higher cost. However, consumer loans, on which banks maintain some of the highest margins, increased by 16.3% year-on-year, commercial and industrial loans increased by 13.6% year-on-year, and real estate loans increased by 2.4%. The latter deserve attention as one of the most common forms of debt. Despite the increase in the borrowing base and lending rates, the average delay in repayment is one of the lowest in over 30 years, at 2.08 days. By comparison, during the 2008 financial crisis, the average delay was more than three times higher.
Which companies might surprise us according to Zacks?
Zacks is an advisory, investment and analytics firm that specialises in equity and stock market research. Zacks Earnings ESP (Expected Surprise Prediction), on the other hand, is an indicator that looks for companies that have recently turned their earnings forecasts positive. The idea behind the indicator is that the most up-to-date information also appears to be the most accurate, which is supposed to give investors an edge during earnings season. This method has proven effective in uncovering positive surprises. Which companies in this sector currently have the highest level of estimated surprise?
According to the institute, analyst consensus would be beaten by 14% by First Horizon National Corporation (1stHorizon), a regional bank holding company that offers a variety of financial services through its subsidiary First Horizon Bank. The bank operates primarily in Tennessee, Mississippi and Arkansas. It offers a wide range of services, including personal and business savings and checking accounts, loans, credit cards and wealth management services. First Horizon also offers investment banking and capital markets services. In addition, the company provides mortgage banking services.
Source: Conotoxia MT5, 1stHorizon, Daily
The second company in the US banking sector that could positively surprise investors is (according to Zacks) The Bank of New York Mellon (BNYMellon). The Bank of New York Mellon is an international financial institution that offers a wide range of banking and investment services. The company is one of the largest depositories and asset administrators in the world and its services include asset management, corporate and private investor services, money market services and securities market services. Zacks expects that its fourth-quarter financial results could be better by about 6.3%.
Source: Conotoxia MT5, BNYMellon, Daily
Another company that could positively surprise with its results, beating them by 3%, is Pinnacle Financial Partners (Pinnacle), a bank holding company that primarily offers retail and commercial banking services in the states of Tennessee and North Carolina. These services include personal and business savings and checking accounts, loans and credit cards, as well as wealth management and investment services. Zacks' forecast seems quite possible here, as the company has continuously positively surprised analysts since mid-2020.
Source: Conotoxia MT5, Pinnacle, Daily
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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