US banks preview

Higher interest rates are generally better for banks, but increasing economic uncertainty might mean higher provisions, which could offset gains.

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It's starting…

Thursday is the unofficial start of earnings season, right before the long Easter weekend. That means the market could react stronger to the earnings releases right before an extended holiday. Of the four major banks expected to report, only Goldman Sachs failed to beat estimates when reporting for the fourth quarter.

Since then, interest rates have moved substantially higher as the Fed hiked, and expectations increased to up to 7 more hikes for the rest of the year. On the other hand, first-quarter earnings typically are seasonally lower than fourth-quarter earnings. On top of that, banks will report the full impact of Russian operations on their earnings. In that context, there could be a divergence between more international banks, such as Citigroup and Morgan Stanley, which act as a payer for Russian bonds; and domestically-focused retail banks such as Wells Fargo.

What to focus on

As the US recovered from covid, banks reversed provisions taken out at the start of the pandemic. This helped increase their bottom line, essentially recognizing the profit they had accumulated previously. Top-line figures from banks last quarter didn't perform as well, with Morgan Stanley and Citigroup reporting less revenue than expected. Given the increased uncertainty, that reversal is likely to not be there to continue supporting earnings and could be the key to how the market reacts to the earnings.

Morgan Stanley is expected to report earnings of $1.74/shr on $14.4B in revenue. Citigroup is forecasted to report earnings of $1.43/shr on $18.3B in revenue. Wells Fargo is expected to report earnings of $0.82/shr on $17.8B in revenue. And finally, Goldman Sachs is forecasted to report earnings of $8.95/shr on $12.0B in revenue.

Big US banks not so ‘big’

Judging by the price action since March’s low, CG, MS, and GS are notably lower in April, whereas WFC is the only one making a good bullish case. City is down a whopping 31.50%, Morgan 7.35%, and Goldman some 13.60% at the time of writing. It seems investors expect WFC to do well indeed, as it’s managed to print a lower high in April, and it’s up 8.50%.

Despite the stocks with larger dips offering a sizeable upside opportunity, being below 0% makes this bet quite a risky one. On the other hand, WFC looks prime to continue its ascend after forming an impulsive upside structure. However, a break of its 10-day average must occur – at least. The 50-day average lies 7% higher.

Source: Trading View

Key takeaways

The market could be more volatile ahead of Easter but analysts expect a strong earnings season as interest rates have moved substantially higher and are expected to increase for the rest of the year.

US banks reversed their provisions made to cope with the pandemic, increasing the bottom line and leading to less revenue in the top line. So, even if earnings are up, the reversal is likely not there to continue supporting.

It is then most likely that those banks less impacted by Russia will perform better: Wells Fargo.