Financials Overview: Week of July 10–14, 2017
US banks’ earnings beat expectations
Buoyed by strong loan and deposit growth, JPMorgan Chase (JPM) reported a 4.7% rise in second quarter net revenue to $26.4 billion, while profits rose 13% to $7 billion. It was the highest profit rise for the three big banks that reported quarterly earnings last Friday. Wells Fargo (WFC) reported a 5% increase in its profit to $5.8 billion with revenue remaining flat. The bank witnessed fall in car loans due to tighter lending standards. On the other hand, Citigroup’s (C) revenue rose 2% to $17.9 billion. Higher taxes and costs caused Citigroup’s profit to fall 3% to $3.9 billion. The bank also made a higher provision for bad loans.
Regional bank PNC Financial Services (PNC) reported a 7.1% rise in its revenue to $4.1 billion for the quarter, while its earnings were $1 billion—up 13.2% compared to 2Q16 and higher than analysts’ estimates.
Banking stocks fell due to disappointing forecast
Although banks’ earnings were better than expected, banking stocks fell due to weak trading revenue and disappointing forecasts, which impacted broader equities. The S&P Financial Sector Index fell 0.6% last week—compared to a 1.4% gain in the S&P 500 Index (SPX-INDEX). The KBW Banks Index fell 0.9%, which indicated a larger fall in bank stocks.
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Broader equities got a boost last week in anticipation that the Fed might not raise interest rates as quickly as expected due weak economic indicators. However, the sentiment dragged down banking stocks due to banks’ sensitivity to interest rate changes. Bank of America (BAC), which has a large retail business, was the worst performer last week—it fell 2.50%. On the other hand, Wells Fargo (WFC) fell 1.4%, J.P. Morgan (JPM) fell 1.70%, and Citigroup (C) fell 1.8%.
The Financial Select Sector SPDR ETF (XLF) followed suit and fell 0.52%, while the Vanguard Financials ETF (VFH) and the SPDR S&P Regional Banking ETF (KRE) fell 0.47% and 1.2%, respectively. The S&P Insurance Select Industry Index (SPSIINS) rose 0.19% last week.
Health insurers want Cruz proposal dropped from Senate bill
America’s Health Insurance Plans and the Blue Cross Blue Shield Association, the US insurance industry’s most powerful organizations, called to drop a provision in the Senate Republican healthcare bill that allows insurers to offer stripped-down, low-cost healthcare plans because it isn’t workable. The two organizations said, “It is simply unworkable in any form and would undermine protections for those with pre-existing medical conditions, increase premiums and lead to widespread terminations of coverage for people currently enrolled in the individual market.”
ETF inflows continued at a moderate pace
After moderate gains last week, ETFs witnessed huge inflows this week. According to Factset, US-listed ETFs witnessed $8.25 billion inflows during the week. The higher inflows were due to the slower-than-anticipated rate hike from the Fed. US equity witnessed inflows worth $3.48 billion, while international equity added $1.67 billion. US fixed income continued to attract investors—compared to equities with inflows worth $3.76 billion.
The inflows were led by the PowerShares QQQ Trust (QQQ) with net additions of $2.88 billion followed by the iShares Core MSCI EAFE ETF (IEFA) with $1.66 billion and the iShares 20+ Year Treasury Bond ETF (TLT) with $567 million.
The outflows were led by the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF), the SPDR S&P 500 ETF Trust (SPY), and the iShares MSCI Japan ETF (EWJ) with redemptions of $1.11 billion, $1.06 billion, and $807 million, respectively.
Rate hike might be delayed
Persistently lower inflation, softer retail sales data in June, and comments from Fed Chair Janet Yellen fuelled speculation that the Fed might not hike the rate this year. Last week, in her testimony before the Congress Committee, Yellen said that inflation is still quite low and the rate doesn’t need to rise much to get to a neutral policy stance.
Bank of America, Goldman Sachs (GS), and Morgan Stanley (MS) will report their second quarter results this week. On the international front, China will report its GDP growth rate, industrial production numbers, and retails sales data this week. The Bank of Japan will report trade data and interest rate decisions. The ECB will announce its interest rate decision this week, while the United Kingdom will release inflation data.