US bank earnings to blend good and bad

[MongiIG]

As earnings season arrives, it promises to be a mixed picture for the big US banking institutions. Video

 

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Monday 11 October 2021 

Costs to rise

After a year of bumper profits, the chickens may be coming home to roost. Wall Street banks face rising costs on several fronts. For starters, the sector needs to put huge amounts of capital to work in new investment in IT and other sectors. Technology spending is a constant drain on earnings, but has ramped up as new fintech firms look to compete against established names.

In addition, a war for talent has seen wage bills rise, and with home working now much more prevalent banks will need to find ways to tempt graduates into their offices even as rival startups promise a host of different benefits, most importantly flexible working.

Trading revenues expected to weaken

Last year's huge volatility saw the trading divisions of the major banks provide a hefty slab of the rise in profitability. This year has been much quieter, as any quick glance at the Vix would tell you. Thus, trading divisions have less to contribute, and this will diminish the appeal of the sector’s earnings this time around.

Fortunately it is not all bad. The growing US economy has led to increased demand for credit from consumers and corporates, improving earnings from the other divisions of the major banks. This goes some way to offsetting the drop in trading revenues although the hit will still be felt.

Rising yields will help boost income too, and while the Federal Reserve (Fed) is still unlikely to move on rates any time soon, the feeling is that the ‘race to the bottom’ on monetary policy has ended for the time being.

Strong technical outlook

Shares in the major banks have continued to perform well overall. As a broad indication of the sector, the XLF ETF, which covers the whole financial sector, has returned to record highs, recovering from the drop of September and notably outperforming the broader indices which have struggled throughout October so far.

Admittedly the uptrend has slowed from the impressive straight-line move of November to May, but this looks to be more a period of digestion before a fresh move higher. Crucially the ETF price is now moving above the 3900 highs of the summer, marking a bullish breakout to the upside.

Source: ProRealTime