Big Three Banks All Miss Estimates for First Time since 2011

Thanks to all three big banks missing their earnings estimates for the first time since Q42011, the financial sector will most likely report actual earnings below analysts’ expectations, both at the start of the quarter and at the end of the quarter, for the fourth time in the past four years, reports FactSet. Tracking reported earnings to date for Q4 2014, John Butters, senior earnings analyst at FactSet, in a research report dated Jan. 16, points out that blended earnings growth has dropped thanks to downside surprises in the financial sector.

Banks report largest downside aggregate differences

According to the FactSet report, during the past week, all three big banks’ actual EPS numbers for the fourth quarter were below analysts’ expectations. While JPMorgan Chase reported actual EPS of $1.19, compared to the mean EPS estimate of $1.31, Citigroup’s actual EPS of 6 cents also fell short of the mean EPS estimate of 19 cents. Bank of America reported actual EPS of 25 cents, as against the mean EPS estimate of $0.32.

Thus, the FactSet analyst points out that companies in the Financials sector (-5.8%) have reported the largest downside aggregate differences between actual earnings and estimated earnings.

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As reported by ValueWalk last week, JPMorgan Chase kicked off fourth quarter reporting season for the Financial Services sector. The biggest U.S. bank by assets reported a 6.6% drop in quarterly profit, hit by higher-than-expected legal expenses. The bank’s net income dropped to $4.93 billion, or $1.19 per share, in the fourth quarter, from $5.28 billion or $1.30 per share a year earlier. Consensus estimates from Thomson Reuters indicated analysts had expected JPMorgan to report quarterly earnings per share of $1.31 on $23.64 billion in revenue. JPMorgan’s reported markets revenue for the quarter, comprised of revenue from its large fixed income arm as well as from its equities unit, dropped 13% from a year earlier to $3.64 billion.

Bank of America too reported lower than expected financial results, with the bank posting 25 cents in EPS on $18.96 billion in revenue compared with its 29 cents in EPS on $21.7 billion in revenue in the same period last year. However, analysts expected the bank to generate 32 cents in EPS on $20.94 billion in revenue for the fourth quarter.

Banks will report y-o-y decline in earnings

The FactSet analyst points out that as a result of the big three banks reporting y-o-y declines in EPS for Q4 2014, it appears the Financials sector will likely report a y-o-y decline in earnings for the third time in the past four quarters. The analyst points out that the blended (by combining actual results for companies that have reported and estimates for companies yet to report) growth rate for the Financials sector is -4.3%.

Significantly, the analyst highlights that in order for the Financials sector to report flat (0%) earnings relative to last year, the remaining companies in the sector would need to beat estimates in aggregate by 6.9%. However, the analyst notes this percentage is above the 5-year average for the S&P 500 as a whole, which is 5.5%, and the more recent 1-year average for the S&P 500 of 4.2%.

Considering the above tall order, the FactSet analyst concludes that the Financials sector will likely to report actual earnings below the expectations of analysts, both at the start of the quarter and at the end of the quarter, for the fourth time in the past four years.