The financial sector, which accounts for 19.8% of the S&P
500 index, saw a superb 2013 thanks to a reviving banking sector in
the U.S. In fact, financial stocks drove the recent rally in the
equity market. Sound balance sheets, an improved asset market and
lower loss provisions were the major contributors to this
Q4 Earnings So Far
The sector seems to have benefited a great deal from easy
comparisons to Q4. As per Zacks Earnings trends for this season,
the financial sector is expected to expand 20.1% on the bottom
line, but suffer 5.1% on the top line. Total earnings for the
finance sector are expected to be up 20.1%, notably the highest
contribution to the S&P 500 index.
Insurance activity is on the rise thanks to the rising rate
environment and is likely to have given a big-time boost to the
overall finance sector in the fourth quarter.
The mixed bag response to the sector can so far be validated by
some latest earnings reports from sector bellwethers including
Goldman, Wells Fargo, Morgan Stanley, JP Morgan Chase & Co.,
Bank of America Corp. and Citigroup.
Apart from Goldman, Wells Fargo, and Morgan Stanley, no other
banking large cap stands out on both earnings and revenues. While
JP Morgan and BofA beat the Zacks Consensus Estimate on earnings,
the duo fell shy of the top line estimate. Performance by Citigroup
was discouraging as it lagged on both lines (read:
Can Bank ETFs Bounce Back After Recent
However, Morgan Stanley's performance was a bit surprising. While
its earnings from continuing operations were a downer (fell 79%
year over year) hammered by $1.2 billion of legal expenses, its
adjusted earnings beat the Zacks Consensus Estimate by a nice
margin and as did net revenues (excluding DVA adjustments).
Results in Detail
Goldman earned $4.60 per share in 4Q, down from the year-ago
earnings of $5.60, but ahead of the Zacks Consensus Estimate of
$4.14. Net revenue declined 5% year over year to $8.8 billion, but
outpaced the Zacks Consensus Estimate of $7.8 billion.
However, investors might have demanded more from this banking giant
as shares were in the red in immediate trading after the earnings
Wells Fargo earned $1.00 in 4Q13, achieving the sixteenth
consecutive quarter of earnings per share growth. Results improved
from $0.91/share earned in the year-ago quarter. The reported
figure bettered the Zacks Consensus Estimate by $0.02.
The quarter's total revenue came in at $20.7 billion, outpacing the
Zacks Consensus Estimate of $20.6 billion. However, revenues were
down 5.5% year over year.
Morgan Stanley continued its positive surprise streak, delivering
another beat in this past quarter and posting $0.50 per share of
adjusted earnings. Net revenue (excluding DVA adjustments) went up
9% to $8.2 billion that outpaced the Zacks Consensus Estimate of
Big Bank Earnings
Meanwhile, BofA delivered a positive earnings surprise of about
7.4%. Quarterly earnings were also 3 cents higher than the year-ago
period. Though fully taxable-equivalent adjusted revenues were up
14% year over year, it was marginally lower than the Zacks
On the other hand, after running into some trouble in the third
quarter, JP Morgan booked a solid earnings result in the fourth
quarter. Its earnings of $1.30 per share came ahead of the estimate
by $0.05 per share.
Kudos mainly go to JP Morgan's inflated legal reserves. However,
earnings were lower by $0.09 per share from the year-ago period.
Net revenue of $24.1 billion in the quarter was down 1% from the
year-ago quarter and was also lower than consensus estimate of $25
all the financial ETFs here
Like Q3, Citigroup restrained itself from posting dismal results in
this quarter as well. Its earnings of $0.82 per share were up
19% year over year but lagged the Zacks Consensus Estimate.
Revenues dropped 2% and fell short of the Zacks Estimate. Issues in
its mortgage pipeline and fixed income trading business hurt its
All the aforementioned companies have considerable exposure in
iShares U.S. Financial Services ETF
PowerShares KBW Bank
Market Vectors Bank and Brokerage ETF
Financial Select Sector SPDR
U.S. Broker-Dealers Index Fund
Vanguard Financials ETF (
Top Ranked Financial ETF in Focus: KBWB
BANK OF AMER CP (BAC): Free Stock Analysis
ISHARS-US BR-D (IAI): ETF Research Reports
ISHARS-US FN SV (IYG): ETF Research Reports
JPMORGAN CHASE (JPM): Free Stock Analysis
PWRSH-KBW BP (KBWB): ETF Research Reports
MKT VEC-BANK&BR (RKH): ETF Research Reports
VIPERS-FINANCL (VFH): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
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Among these ETFs, only IAI (0.44%) and RKH (0.64%) gained in the
last 5 days thanks mainly to Goldman's and Well Fargo's relatively
better results among the banking set, respectively. In fact, the
magnitude of gain was higher in these names than the S&P 500
index (0.42%). Conversely, the other four slipped in the range of
0.02% to 0.66%.
What's in Store Ahead?
The stupendous rally in finance stocks in 2013 might stumble in the
upcoming quarter as the current Zacks earnings trend calls for a
year-over-year slowdown in each of first three quarters of 2014
mainly due to lower revenue expansion.
However, the scenario will become brighter again starting in the
third quarter of 2014. Long-term projections are also favorable
with, respectively, 10.6% and 10.3% growth projected for 2014 and
the top Ranked ETFs here
Investors should note that while everything seems to be in place
for the U.S. financial sector, some near-term glitches arising out
of stringent banking rules might loom large in the coming days.
Among a variety of rules, the Dodd-Frank regulations which came
into being in 2010 take the top spot.
Recently, a lot has been said about one major clause of the
Dodd-Frank regulations - the so-called 'Volcker Rule'. This
specific rule had been kept on hold for long, and lately the
variety of financial regulators have agreed on a way to move
forward with this rule, giving banks until July 2015 to meet the
terms of the provision (read:
3 Financial ETFs to Watch on Volcker Rule
If this was not enough, the credit-rating organization
downgraded the long-term senior unsecured debt of four top-tier
U.S. banks including Goldman and J.P. Morgan last December, to add
to the woes.
Having said all this, financial institutions which are more into
the broker-dealer/capital markets segment might get their share of
aid next year thanks to the Fed's potential phased tapering. Also,
the companies which are more domestic-centric can win the show this
year as these will capture the growth stories in the U.S. and
potentially profit again in 2014 (read:
Financial ETFs Tumble on Citigroup Warning
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