Earnings to date, Financials
Over the past month, I have often stated that it works in favor of further S&P 500® Index (SPX) (Figure 1.1) appreciation to have financials (Figure 1.2) kick off the current earnings season. Momentum, both technical and fundamental, is on their side. After last year’s sector-leading 28.42% appreciation and this year’s once again sector-leading 4.58% gain, investors are acknowledging the positive momentum with investments in both financial institution equity and debt markets.
To date, 11 of the 42 SPX companies reporting have been financials. There is nothing within the earnings reported for financials to suggest investors lower their allocations to the sector. The path to normalized earnings is accelerating, valuations remain at historically low levels, and street estimates are way too low. For instance, on Tuesday, the day before Goldman Sachs (GS) reported $5.60 EPS, +204.35%, and revenue of $9.23 billion, +52.69%, the average 12-month price target for GS was below the current price of $136.
Drivers of further upside potential in 2013, which would offset the known headwind of declining net interest margin, include:
- Share buybacks acceleration
- Continued robust mortgage fees
- Mortgage securities held by investment banks continuing to appreciate in value
- Continued focus on expense management
The argument against further favorable contribution from financial institutions is generally presented by those who have held a bearish view on the sector since 2008. Regulatory hurdles, declining net interest margins, lack of M&A, and loss of trading revenue are cited. While some of those headwinds do persist, it is rather obvious when the pure evidence of earnings is presented, that further repricing higher of financial institutions is achievable.
Financial Earnings Reported to Date
Sales growth of 12% and EPS growth of 54% for the 11 institutions reporting to date:
M&T Bank MTB $2.16 EPS +72.8% Revenue of $1.12 billion +10.2%
US Bancorp USB $0.75 EPS +17.1% Revenue of $5.05 billion +0.16%
Comerica CMA $0.69 EPS +15% Revenue of $628 million +0.32%
Wells Fargo WFC $0.94 EPS +28.8% Revenue of $22.14 billion +6.5%
SLM Corp SLM $0.55 EPS + 7.8% Revenue of $1.08 billion (-18.8%)
Discover DFS $1.07 EPS +12.6% Revenue of $1.99 billion +10.6%
JPMorgan JPM $1.62 EPS +80% Revenue of $24.4 billion +13.5%
Northern Tr. NTRS $0.71 EPS +1.4% Revenue of $969 million +0.49%
Bank of NY BK $0.56 EPS +19.1% Revenue of $3.85 billion +2.34%
Goldman GS $5.60 EPS +204.35% Revenue of $9.236 billion +52.69%
Schwab SCHW $0.15 EPS +15.38 Revenue of $1.21 billion +9.1%
Figure 1.1 S&P 500 Index (SPX) 2012 & 2013
Figure 1.2 XLF 2012 & 2013