Earnings Previews - Bank earnings will be boring!

We officially kick off the third quarter earnings season with the big banks reporting on Friday the 13th. I doubt we’ll see anything too spooky though.

We’re at a point where there aren’t very many surprises left for the banks. The Fed’s Bank Term Funding Program (BTFP) has successfully managed to stave off any issues and it’s mainly the Regional Banks that we’re concerned about any way. As for this Friday, there are a few things to note but before we get into that, let’s look at what the market expects.

This post turned out to be longer than I expected but, as always you can pick and choose to read about the companies that interests you. As always, we’re not trying to predict how the companies will perform but rather what we can learn about the health of the economy and the macro.

S&P 500 Earnings Expectations

We think the overall earnings decline of -0.49% and revenue increase of +1.52% is overly optimistic and we’re likely to see further pressure on earnings. This earnings season will be all about demand and the topline. As we see PPI and CPI retreat, the consumer becoming weaker and the US Dollar surging - the topline is what we will be concerned with.

Just a few reminders:

• The Blended earnings growth rate is a blend of the expected earnings results and the reported earnings results. So as we move through earnings season this will change and match the final “Growth Reported” Column.

• Some companies have already reported as they have an odd earnings calendar

• There are 503 companies instead of 500 to account for the Class A and B share for the likes of Google.

Sector and Stocks

Clearly we’re expecting the Energy sector to deliver the worst results. Much of this is because of the comps. Remember, we are comparing Year-on-Year earnings and last year oil prices were much, much higher yielding fantastic results for the oil companies.

As for the stocks, here are the top and bottom 12 in terms of expectations:

And the week to look out for will be the week beginning October 23, 2023. This is the big week dominated by most of the big tech stocks and the top companies in the Dow.

This Week’s Earnings

Before the banks report on Friday we also have a couple of other companies reporting tomorrow - Thursday, Oct 12, 2023 - all before market open.

• Walgreens Boots Alliance (WBA) - Unfortunately, Walgreens has been struggling for the last few month, as has their share price. I doubt we’re going to hear very good news from the company when they report as we continue to hear about store closures. Since July, they’ve lost their CEO and their CFO and only recently appointed a new CEO who starts on Oct 20. Most recently they are experiencing employee walkouts over working conditions. Walgreens trades at a PE of 5 which make them very lucrative but we won’t be touching this one until they can get their corporate strategy right.

• Delta Airlines (DAL) - Delta has already lowered EPS guidance from $2.20- $2.50 to $1.85-$2.05, so we’re unlikely to get any major surprises. What we will be hearing is that ticket sales have slowed and they don’t expect a surge in demand any time soon. I would be keen to hear what they have to say about

  • business travelers

  • the impact of wage negotiations

  • the new proposal from the FTC on junk fees that ban companies from charging hidden and misleading fees and require them to show the full price up front.

  • fuel prices going forward (there shouldn’t be much of an impact for Q3 earnings)

• Domino’s Pizza (DPZ) - This will be a great preview into what’s to come for restaurants, particularly quick-service restaurants (QSRs). There is a bit of a trade off here as the consumer becomes weaker, they tend to trade down and QSRs get a boost. But, we continue to see inflation remaining high (CPI - Food away from Home) in this category so the question is how many of these consumers actually stop eating out altogether. We know Domino’s has recently tied up with Uber eats for ordering and that sounds like a demand problem. Deliveries will still be done by Domino’s so there’s a question of bearing that cost.

• Fastenal (FAST) - Fastenal is he first of the industrials to report. They make fasteners, nuts, bolts, tools and safety equipment. They had a double miss last quarter and revenues are expected to decline further into the second half of the year. What I would be keeping an eye on is margins. The Industrials have been earnings peak margins and last quarter Fastenal already took a -1.1% hit to gross margins and -0.60% hit to operating margins. This will set the tone for the industrials.

Banks

Finally, the Banks. As the title suggests, I think the bank earnings will be boring this time. I doubt there will be much for us to dig into. Earlier this week I posted an article on how to read bank earnings, here’s a handy cheat sheet from that.

Net Interest Margins

The big banks are in good shape. They have plenty of liquidity and over the last one year have been increasing their Net Interest Margins (NIMs). The NIM is the Net Interest Income minus the Net Interest Cost, i.e., the amount the bank earns on loans less the amount they pay on deposits.

I suspect that this quarter we will see banks talk about increasing their interest costs, as most banks have started to pay out on deposits. With the Fed coming close to the end of their tightening cycle, the banks are now at their peak margins and it will only get more challenging from here.

Credit Provisions and Net Charge-offs

The banks have been taking provisions for defaults for a year now. There will likely be some increase but, I suspect not a lot. However, what we will see are those provisions becoming defaults. Provisions are taken in anticipation of defaults. When the actual default happens, it hits the bottom line earnings. We will see this crop up in the regional and smaller banks.

Efficiency Ratio or Costs

I expect costs to increase because of the layoffs and restructuring. Layoffs lead to severance packages and we’re likely to see some of that continue for this quarter. They should normalize by the end of the year.

Share Repurchases

Most banks have already halted share repurchases in anticipation of a difficult economic environment. JP Morgan still has an authorization to repurchase shares and they increased their dividend but, we’re not seeing any new authorizations come through.

Investment Banking

Investment Banking has been particularly hard hit over the last year. But, we’re seeing mergers and IPOs starting up again. We’re also seeing a huge amount of funds move to money market funds and we think that the trading desk has been steadily improving revenues and that should be more evident this quarter.

New Bank Regulations

Banks will need to increase their reserves or improve their collateral / security. The latest regulations suggest that banks will need to put aside more capital for every dollar that they lend out. Now, while most banks are tightening their standards anyway, these increased regulations will mean even tighter standards. Interestingly though, bank lending has not declined as much as we have expected and that’s something we will look out for during this quarter.

Liquidity

Liquidity has been improving at the banks. A major issue during the banking crisis in March was that many of the banks did not have sufficient deposits to cover their customers. Much of that was because banks were refusing to pay on these deposits. That situation has changed, which is why we think that there will be lower margins.

Here’s a snapshot of the banks reporting on Friday and their liquidity situation. All these banks remain adequately capitalized and have sufficient liquidity. Valuations also remain attractive. As for JP Morgan, they have a fortress balance sheet.

All in all, I think the bank reports will not bring us anything exciting but, they will still be important to review because we will understand:

• More about the future of the economy

• How the consumer is doing in terms of spending patterns and financial health

• New regulations affecting how much businesses can borrow