US banks' dismal first quarter may spell trouble for 2016

Before you go, we thought you'd like these...
Before you go close icon

2016 may be a rough year for banks, thanks to bad first quarter

It is only April, but some on Wall Street are already predicting a rotten 2016 for U.S. banks.

Analysts say it has been the worst start to the year since the financial crisis in 2007-2008 and expect poor first-quarter results when reporting begins this week.

Concerns about economic growth in China, the impact of persistently low oil prices on the energy sector, and near-zero interest rates are weighing on capital markets activity as well as loan growth.

SEE ALSO: For the first time in almost a century, sending mail got cheaper

Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group Inc (GS.N), are expected to report the worst results in over ten years.

This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year.

"What's concerning people is they're saying, 'Is this going to spill over into other quarters?'" Goldman's lead banking analyst Richard Ramsden said in an interview. "If you do have a significant decline in revenues, there is a limit to how much you can cut costs to keep things in equilibrium."

Investors will get some insight on Wednesday, when earnings season kicks off with JPMorgan Chase & Co (JPM.N), the country's largest bank. That will be followed by Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) on Thursday, Citigroup Inc (C.N) on Friday, and Morgan Stanley (MS.N) and Goldman Sachs Group Inc (GS.N) on Monday and Tuesday, respectively, in the following week.

EXPLORE MORE: Daily Mail parent in talks with private equity for Yahoo bid

Banks have been struggling to generate more revenue for years, while adapting to a panoply of new regulations that have raised the cost of doing business substantially.

The biggest challenge has been fixed-income trading, where heavy capital requirements, new derivatives rules, and restrictions on proprietary trading have made it less profitable, leading most banks to simply shrink the business.

Bank executives have already warned investors to expect major declines across other areas as well.

Citigroup Inc (C.N) CFO John Gerspach said to expect trading revenue more broadly to drop 15 percent versus the first quarter of last year. JPMorgan Chase & Co's (JPM.N) Daniel Pinto said to expect a 25 percent decline in investment banking. Several bank executives have warned about declining quality of energy sector loans.

Global investment banking fees for completed merger and acquisitions, and stock and bond underwriting, totaled $15.6 billion in the first quarter, a 28 percent decline for the year-ago period, according to Thomson Reuters data.

Volatility in stock prices and plunging commodities prices caused trading volume to dry up during most of the quarter. Trading activity picked up slightly in March but was not strong enough to offset declines during the first two months of the year.

Analysts have been lowering first-quarter estimates over the last month in light of business pressures. They now expect JPMorgan to report adjusted earnings of $1.30 per share, Bank of America to report 24 cents per share, Wells Fargo to report 99 cents per share, Citigroup to report $1.11 per share, and Morgan Stanley to report 63 cents per share. Goldman is expected to report $3.00 per share, the lowest first-quarter earnings since before the financial crisis.

Matt Burnell, a Wells Fargo banking analyst, said in a research note Friday that capital markets weakness may extend at least into the second quarter.

Analysts said there may be some loan growth outside of the energy sector, and a small uptick in net interest margins, a measure of loan profitability, but overall, the tone was less-than-optimistic.

"The first quarter is going to be ugly and we don't think that necessarily gets recovered in the back half of the year," said Jerry Braakman, chief investment officer of First American Trust, which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman. "There are a lot of challenges ahead."

(Reporting by Olivia Oran in New York; editing by Lauren LaCapra)

Read Full Story


S&P 500 2,388.61 14.46 0.61%
DJIA 20,996.12 232.23 1.12%
NASDAQ 6,025.49 41.67 0.70%
DAX 12,467.04 12.06 0.10%
NIKKEI 225 19,079.33 203.45 1.08%
HANG SENG 24,455.94 316.46 1.31%
USD (per EUR) 1.09 0.01 0.60%
USD (per CHF) 0.99 0.00 -0.26%
JPY (per USD) 110.98 1.34 1.22%
GBP (per USD) 1.28 0.01 0.46%

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside
Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts
If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic