Banking Earnings Soft: Buy Financial ETFs On Value?

The financial sector, which accounts for around one-fifth of the S&P 500 index (SPY), had a sluggish- to-decent Q3. Weak capital market activities and global growth worries along with a low interest rate environment dealt a blow to the space.
However, modest gains in loan growth amid low interest rates, investment banking activities thanks to surge in corporate actions and cost containment efforts helped the space to stay afloat in the quarter. As evident from the big bank earnings, the sector has been an average performer.
Per the Zacks Earnings Trend issued on October 14, financial earnings are expected to jump 9.6% this quarter on 3.7% lower revenues. To be more specific, easy comparisons at Bank of America Corporation or BofA (BAC) is leading the sector. Excluding Bank of America, results would have been much more muted than it looks now. Earnings would fall in absence of BofA’s stellar growth (read: Guide to the 7 Most Popular Financial ETFs).
Let’s take a look at the big banks’ earnings which released lately.

Big Bank Earnings in Focus

JP Morgan (JPM) reported earnings of $1.32 per share missing the Zacks Consensus Estimate by 4.4% and the year-ago earnings by 2.9%. Managed net revenue of $23.5 billion in the quarter was down 6% from the year-ago quarter. It also compared unfavorably with the Zacks Consensus Estimate of $23.8 billion.

Goldman (GS) earned $2.90 per share in Q3, falling short of the Zacks Consensus Estimate of $3.08 per share and declining from the year-ago figure of $4.57. The shortfall in earnings reflected a fall in revenues, hurt by lower trading activity in the quarter, be it bonds, currencies or commodities (read: 3 Sector ETFs Hit Hard by the Market Sell-off).
Net revenue dived 18% year over year to $6.9 billion for the quarter. Revenues also lagged the Zacks Consensus Estimate of $7.3 billion. Lower net interest as well as non-interest income weighed on the top line.
Citigroup Inc.’s (C) adjusted earnings per share of $1.31 for the quarter outpaced the Zacks Consensus Estimate of $1.29. Further, earnings compared favorably with the year-ago figure of $0.95 per share. Adjusted revenues of Citigroup declined 8% year over year to $18.5 billion. Also, the revenue figure missed the Zacks Consensus Estimate of $18.76 billion.

Wells Fargo (WFC) earned $1.05/share in 3Q15 beating the Zacks Consensus Estimate by a penny. The reported figure was also above the year-ago number of $1.02 per share. The quarter’s total revenue came in at $21.9 billion, outpacing the Zacks Consensus Estimate of $21.5 billion. Moreover, revenues rose 3.3% year over year.

Bank of America Corporation’s third-quarter earnings of $0.37 per share outdid the Zacks Consensus Estimate of $0.34. Further, the bottom line witnessed a significant improvement from net loss of $0.04 incurred in the prior-year quarter. Net revenue of $20.7 billion was down 2% year over year and met the Zacks Consensus Estimate.

ETF Impact     

Despite a run of listless results from banks this week, the concerned ETFs buoyed up on the recent Fed-induced optimism. Most U.S. financial ETFs returned at least 1% since the earnings came out (as of October 15, 2015) (read: 3 Financial ETFs for Dividend and Growth).

All the aforementioned companies have considerable exposure in funds like iShares U.S. Financial Services ETF (IYG), PowerShares KBW Bank (KBWB), Financial Select Sector SPDR (XLF), U.S. Broker-Dealers Index Fund (IAI) and Vanguard Financials ETF (VFH).
All the funds are in green post big banks’ results, having returned in the range of 1─1.8% (as of October 15, 2015) (see all the financial ETFs here).

It seems that investors are paying more heed to the market rally which could boost the weakling of this quarter – trading activities, going forward. The bond market is also displaying a strong trend on a dovish Fed and a delayed rate hike possibility. This could go in favor banks’ client activity in the fourth quarter.

In any case, sooner or later, the U.S. economy is due for a lift-off and U.S. banks are now much more well-balanced than they were at the time of the last recession. All the aforementioned ETFs apart from IAI have a Zacks ETF Rank # 2 (Buy), sport compelling valuation and thus emerge as better plays than an individual stock pick.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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