Earnings season is starting to get underway with the first round of big banks reporting at the end of this week. Both JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC) release results before market open on Friday, January 12.
The last three months have been pretty good for the banks overall as economic growth picked up, tax reform was passed, and the Fed continued to raise the fed funds rate, bringing the total to three quarter-point rate hikes by the end of 2017.
One area that analysts have expressed some concern about for the big banks is the flattening yield curve. Spreads between short and long-term Treasury yields have continued to narrow, which typically pressures net interest income, the difference between revenues generated by a bank’s assets and the expenses associated with paying its liabilities.
JPMorgan Chase Earnings and Options Trading Activity
For Q4, JPM is expected to report adjusted earnings per share (EPS) of $1.69, up from $1.58 in the prior-year period, on revenue of $24.99 billion, according to third-party consensus analyst estimates. Revenue is expected to increase 2.7% year over year from $24.33 billion. JPM has beat both earnings and revenue estimates in the past eight quarters.
If you’re interested in learning more what’s happening across global economies, consider listening to JPM’s earnings call. Due to the size and scope of its business around the world, CEO Jamie Dimon often discusses broader macroeconomic factors impacting different markets.
On this quarter’s call, analysts are also expecting more information regarding the company’s plans now that tax reform has been solidified. Most analysts are expecting about a 17% boost to JPM’s 2019 net income thanks to tax savings. However, CFO Marianne Lake said the company expects as much as a $2 billion one-time adjustment, largely a result of overseas earnings facing taxation—several executives from different big banks have indicated they expect large one-time charges from this and write-downs of deferred tax assets as well.
Another area of focus for analysts is likely to be JPM’s trading divisions, which have faced declines in recent quarters amid lower volatility across markets. In the third quarter, the company reported that trading revenue declined 21% year over year, with the steepest drop in fixed-income trading.
Around JPM’s upcoming earnings release, options traders have priced in about a 1.6% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the January 12 weekly expiration, trading has been heavier on the call side, with most of the activity concentrated at the 110 strike. The 113-strike call also saw a decent amount of activity yesterday with 2,300 contracts trading hands. On the put side, the 107 and 108 strikes have been the most active.
Looking at the January monthly expiration, open interest this morning was at 33,206 for the 110-strike call, compared to 16,118 at the 110-strike put. As of this morning, implied volatility is at the 59th percentile, quite a bit higher than it was ahead of last quarter’s report.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
JPM STOCK CHART. After bouncing up and down through mid-2017, JPM started to move higher at the start of September. The stock rallied from the end of November until the end of the year as Congress progressed on passing tax reform and economic growth ticked up. The bottom chart shows the implied volatility for JPM. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Wells Fargo Earnings and Options Trading Activity
For Q4, WFC is expected to report adjusted earnings of $1.04 per share, up from $0.96 in the prior-year quarter, on revenue of $22.43 billion, according to third-party consensus analyst estimates. Revenue is expected to increase 3.9% year over year.
The company has a sizable mortgage business, and it’s typically one of the larger focuses among analysts. Despite the Fed hiking the fed funds rate, mortgage rates have remained not too far from historic lows, which could potentially help support mortgage demand. One thing to keep in mind is this is typically a slower quarter for banks’ mortgage activity due to seasonality factors in home buying.
In the third quarter of 2017, WFC reported net interest income increased 4% year over year to $12.5 billion, while noninterest income declined 9% to $9.5 billion. Net interest margins dropped 3 basis points to 2.87% from the second quarter of 2017. WFC primarily attributed the decline in noninterest income to lower mortgage banking revenue.
Options traders have priced in about a 2% potential stock move in either direction around WFC’s earnings report on Friday. In short-term trading at the January 12 weekly expiration, calls have been active at the 63 and 63.5 strike prices, right around the money. On the put side, trading has been heaviest at the 62 strike, although there’s been a decent amount of activity ranging from the 61 strike to the 63 strike.
At the January monthly expiration, there’s been quite a bit of activity at the 62.5 strike, with open interest of 34,884 at the end of yesterday’s session. As of this morning, the implied volatility sits at the 62nd percentile.
WFC STOCK CHART. Trading in WFC was pretty choppy for much of 2017 as it continued to deal with the fallout from its 2016 sales scandal involving associates opening unauthorized accounts. Since the end of November, shares have jumped, along with the broader financial sector, from around $54 to around $61, ending the year with an 8.34% return. The bottom chart shows the implied volatility for WFC. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Next week, the rest of the big banks will report their results. Citigroup Inc (NYSE: C) reports before market open on Tuesday, January 16, Bank of America Corp (NYSE: BAC) and Goldman Sachs Group Inc (NYSE: GS) report before market open on Wednesday, January 17, and Morgan Stanley (NYSE: MS) reports before the open on Thursday, January 18. If you have time, make sure to check out today’s Market Update to see what else is happening.
Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
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