U.S. banks to stay in fashion as earnings kick off

Sat Jan 14, 2017 7:10am EST
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By Sinead Carew and Lewis Krauskopf

NEW YORK (Reuters) - U.S. bank stocks will stay in favor with investors as long as earnings reports in the coming week show an improving profit outlook while investors wait to see if U.S. President-elect Donald Trump lives up to his campaign promises.

Wells Fargo & Co. (WFC.N: Quote), JPMorgan Chase & Co (JPM.N: Quote) and Bank of America (BAC.N: Quote) kicked off the earnings season on a positive note on Friday, sending the S&P 500's banking sub-sector .SPXBK up as much as 2.3 percent to its highest since February 2008 before paring gains. It closed trading up 0.8 percent compared with a 0.2 percent gain for the broader S&P 500 .SPX.

The banks' top executives expressed optimism on Friday about 2017 in their first public comments about earnings since Trump won the presidential election on Nov. 8.

The bank index rose 24.8 percent between Nov. 8 and Dec. 9 then traded sideways for a month as bond yields fell. Investors were waiting for earnings and for concrete plans from Trump who has said he supports lower taxes, fiscal stimulus and lighter regulation, which would all help banks.

Results and guidance from the big banks scheduled to report in the week ahead could boost the sector, according to John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

"Results are likely to be good and the outlook is going to be positive so there's room for further gains," said Praveen.

The S&P banks index has traded recently at 13.6 times earnings estimates for the next 12 months compared with its five-year average multiple of about 11 but in line with the 10-year average of 13.1, including the 2008 financial crisis, according to Thomson Reuters data. The banks' multiple is well below the broader S&P 500's forward price/earnings ratio of 17. But the banks' discount to the broader market has been shrinking since before the election.

Praveen sees a bigger multiple expansion for the banking sector than for the S&P as a whole as more defensive sectors like utilities or consumer staples that are sensitive to interest rate hikes will likely not enjoy as much expansion.   Continued...

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly