Financial Professionals


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:


Regional Banks

M&T Bank       MTB    $2.16 EPS +72.8%        Revenue of $1.12 billion +10.2%


Diversified Banks

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%


Consumer Finance

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%


Financial Services

JPMorgan   JPM     $1.62 EPS +80%           Revenue of $24.4 billion +13.5%


Capital Markets

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


Source: Bloomberg


Figure 1.2 XLF 2012 & 2013


Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.