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 Four of the S&P 500's top-weighted banks, J.P. Morgan Chase, Wells
Fargo, Bank of America and Citigroup, are set to report grim
first-quarter revenues and profits starting on Wednesday.
Analysts are expecting first-quarter reports in the financial sector
to show a 9.2-percent decline in earnings and a 0.2-percent rise in
sales.
The financials have been the worst performing S&P 500 sector this
year, down 8 percent as the broader S&P 500 is flat.
"We think banks are about as low as they can go," said Tim Ghriskey,
chief investment officer of Solaris Group in Bedford Hills, New
York.
Bank shares are cheap compared to the rest of the market. Companies
in the S&P financial sector are selling at roughly 12.8 times
estimated earnings over the next 12 months, compared with 16.7 times
forward earnings for the broader S&P 500.
Investors like Ghriskey will be parsing those reports to determine
if the low prices present buying opportunities or simply reflecting
the sad reality of poor earnings for some time to come.
Ghriskey, who said he'd be "very surprised to see positive
earnings," said he will look beyond the numbers in the case he can
gleam optimistic forecasts from bank managers. His firm is modestly
overweight on financial services.
The sector has remained troubled since the global financial crisis
as banks have battled prolonged low interest rates, faced an
onslaught of pricy reform mandates, and, more recently, were hit by
lending to risky oil and gas companies.
Even at seabed-low prices, it won't be easy for banks to prove their
shares are a good buy.
Investors will look for notes about the type of exposure banks have
to the energy sector, which is facing its first quarterly loss in at
least a decade, according to Thomson Reuters data, and is expected
to be the biggest drag on the S&P 500.
Bank shares could become more appealing if the companies can show a
relatively healthy energy portfolio or that they are losing less
money than expected on energy loans. Their forecasts might also
strengthen if oil prices are in fact settling, as has seemed to be
the case recently.
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U.S. oil prices, which had fallen to a low of about $26 a barrel by
mid-February, had stabilized near $40 in March.
Investors will also look for signs of strength in banks' investment
and trading arms, said Nomura senior analyst Steven Chubak.
"Any constructive comments on the capital markets outlook would be
well-received given the very challenging operating backdrop in Q1,"
Chubak said.
Kim Forrest, vice president at Fort Pitt Capital Group in
Pittsburgh, does not expect much from the financial sector going
into earnings week, but said investors will be looking for
opportunity due to the low prices.
An incentive to buy could include commentary about an increase in
the demand for loans and banking products. "That could propel their
shares higher," Forrest said.
Earnings week begins in earnest across sectors on Monday, with
metals company Alcoa <AA.N> scheduled as the first to report.
Looking at the broad S&P 500, analysts' forecasts have been reduced
so low that many companies are likely to beat estimates despite
frail earnings.
(Editing by Linda Stern and Nick Zieminski)
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