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January 26, 2016

Earnings Roundup: Strong Performance by Big Banks Counters Weakness in Regional Banks

by Greg Harrison.

Earnings season picked up the pace this week, as 41 S&P 500 companies reported their Q4 results. The blended earnings growth estimate increased this week to -4.3% from last week’s -4.7%. The low earning expectations continued to work in companies’ favor as 71% of this week’s reporting companies exceeded their EPS estimates. On the revenue side, however, the weakness has continued as only 51% of companies beat their sales estimates. This comes despite similarly low expectations, as analysts currently forecast aggregate S&P 500 revenue to decline 3.6%.

Financials was the most heavily represented sector this week, with 19 companies reporting. Of these companies, 68% posted positive earnings surprises while 58% beat revenue estimates. Within the sector, however, there is a disparity in results between the large and small banks. Looking at large banks as defined as those in the Diversified Banks sub-industry and the Investment Banking & Brokerage sub-industry, we see that five of the six to report this week either met or exceeded EPS estimates and only one reported an earnings decline. In contrast, four of the seven companies in the Regional Banks sub-industry saw declining earnings and three of the seven missed their EPS consensus. A different story appears when looking at revenue, however. Only half of the large banks reported positive earnings growth this week, while all seven Regional Banks did so.

Exhibit 1.  S&P 500: Q4 2015 Earnings vs. Expectations

c1

Source: I/B/E/S data

Goldman Sachs Group Inc. (GS.N) reported earnings growth of 6.8% this week, while revenue decreased 5.4%. Full year 2015 revenue for the firm was reported as flat from 2015. Still, the company was able to grow earnings through concentration on higher margin businesses and cost controls. CFO Harvey Schwartz discussed this during the earnings call, “Obviously we’ve done a lot of work on expenses. We were very early to expense-reduction initiatives. As you know, we started several years ago. Those have continued for those businesses that have faced head winds and we’ve been investing in those businesses that we feel we’ve had tail wind. As I pointed out, head count’s up 8% this year, and compensation and benefits were flat. I think we’ve done a pretty good job at this stage. We’ll continue to monitor it, but at this particular — given all of the work we’ve done, we will always look to be more efficient, but I think we’ve chopped a lot of wood here.”

In contrast, Fifth Third Bancorp (FITB.O) grew revenue 30.0% in Q4 but still saw earnings decline 4.7%. Like many smaller banks, Fifth Third’s reliance on commercial and branch banking caused margins to suffer. Tayfun Tuzun, CFO, addressed the question of margins during the earnings call, saying “Moving to NII on page 5 of the presentation. Taxable equivalent net interest income decreased $2 million sequentially to $904 million primarily driven by the full quarter impact of the $2.4 billion of wholesale debt issuances in the third quarter and our auto loan securitization completed in November. The net interest margin was 285 basis points, down 4 basis points from the third quarter driven by the impact of those debt issuances, slower prepayments reducing net discount accretion on the investment portfolio and an increased short-term cash position during the quarter.”

 

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