Top banking stocks to watch as US financial sector earnings roll in this week

Banking sector set to see profit loss as interest rates rise and inflation persists

Banking stock valuations have lagged the broader market since the end of 2021. Market sentiment should now return, but not before the sector faces some setbacks in the period ahead.

JP Morgan Chase (JPM), Morgan Stanley (MS), Citigroup (C) and Goldman Sachs (GS) are among the banking firms expected to report their second quarter results in the coming week.

Over the past year, the S&P 500 (US500) has fallen 11%, while the financial sector within the index has fallen 14%. This was mainly because market sentiment shifted away from financials as the market priced in a possible recession. This should reverse now that the stock market is bottoming out.

S&P 500 (US500) Price Chart

Upcoming earnings could dampen this correction as a slowing economy is likely to eat into bank earnings. However, the balance sheets of these stocks remain strong and indicate a strong ability to weather this economic cycle.

Earnings expectations

Rob Murphy, chief executive of Edison Group, expects banking sector profits to fall in the next quarter.

He said: “The main drivers are likely to be a gradual normalization of loan loss provisions from very low levels following excessive reserves during the pandemic, a decline in mortgage banking income as refinancing slows due to the sharp rise in mortgage rates and lower equity. and income from debt capital markets.

He adds that this will be partially offset by improvements in net interest margin.

Sheraz Mian, director of research at Zacks, agrees in a report banking sector profits are expected to fall in future reports.

However, measuring growth has been complicated in the financial sector since 2020.

When the pandemic began, the banking industry set aside large reserves as provisions to protect against the uncertain economic outlook at the time, which, on paper, reduced profits. They later released them, which made the inflated earnings appear.

According to the Zacks report, when earnings are examined on a “before provision” basis, earnings in the banking sector have essentially been flat year over year.

The report also states that for now “the shift in sentiment towards banks is likely to the downside as the economy remains strong even as recession risks have risen from very depressed levels. We see bank stocks currently being attractively positioned based on their valuation as well.”

Stocks to Watch

JP Morgan has been one of the best performers in the banking sector over the past three months, according to Zacks research, it has tracked tech stocks over the past three months.

Increased loan demand and rising interest rates had a positive impact on its margins, increasing both loan and investment income. The company expects a nearly 25% increase in net interest income according to Zacks’ analyst note.

JP Morgan’s balance sheet remains healthy and the bank is expected to open 400 new whites by the end of 2022.

The effects of Russian sanctions cost the company $524 million in the first quarter, further impact from the war in Ukraine will likely be visible in the next report.

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In its second-quarter results, JP Morgan reported a 28% loss in net profit, about 4% below consensus forecasts. It also suspended its share buyback in an effort to protect its reserves.

JP Morgan Chase (JPM) Price Chart

Morgan Stanley has beaten consensus estimates for the past four quarters. The company has taken steps to capitalize on multiple aspects of capital markets. This is evident from its recent acquisitions of Eaton Vance, an investment management group, and E*Trade Financial, an online trading platform.

It has placed more emphasis on business lending and should benefit from rising interest rates in this area.

The company has sound fundamentals and should meet its obligations even if the economic situation deteriorates.

Morgan Stanley also reported earnings below expectations, reporting an 11% revenue loss for the second quarter of 2022. Much of it came from the company’s investment banking arm.

Morgan Stanley (MS) price chart

Citigroup was an underperformer among the banking sector. The bank came under pressure on its net interest income in 2018 and 2019, which should be eased in the current high interest rate economy. The company is expected to increase its paid branch in the coming months.

After stopping the buyback program in 2020 to preserve liquidity, it has resumed the program periodically since. It has returned $4 billion to its shareholders by the first quarter of 2022.

Citigroup Pricing Table (C)

Another company that has underperformed the sector over the past three months.

Its core business remains its strength. The company has taken steps to grow its wealth and asset management businesses, while expanding its consumer digital banking platform.

Goldman opened an automated wealth management platform called Marcus in 2021 to digitally expand its financial offerings to clients.

In 2021, it increased its dividends by 60% and expects a further increase of 25% during the third quarter of 2022.

Goldman Sachs (GS) Price Chart

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