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Curatia Analysis for Thu, Apr 11

Market Roundup: Q1 2019 Earnings Season

Q1 earnings season kicks off tomorrow as JPMorgan and Wells Fargo post results. Citigroup and Goldman Sachs will report Monday, with BAML and Morgan Stanley due up Tuesday.

European banks report later this month, led by Credit Suisse (April 24), Barclays (April 25), Deutsche Bank (April 26), and UBS (April 30).

The Ugly.

Early indicators are quasi-apocalyptic. Currency trading’s opening to 2019 was “‘soul destroying,’” JPMorgan said. European investment banking fees suffered a “punishing start to 2019,” setting up a “nightmare quarter” for Europe’s banks and reflecting “lowered expectations” for financial firms globally.

Industry bellwether Jefferies saw investment banking revenue plunge 36% in its Q1.

More broadly, consensus estimates for S&P 500 YoY bank earnings have retreated from +8.2% six months ago to +2.3% last week.

Behind those numbers lies a trio of troubling trends. The Fed’s decision to pause rate hikes has raised fears that lenders’ interest income has peaked. Moreover, a rising risk of recession will likely dampen corporate loan demand.

At the same time, banks’ fixed-income trading operations were pummeled in Q1. Last week, KBW lead analyst Brian Kleinhanzl predicted a 15% drop in trading revenues in both equities and FICC.

Perhaps worst of all for banks, trading struggles amid both a December swoon and Q1’s steady rise imply that their “goldilocks zone” of volatility is exceedingly narrow.

...The Bad...

Those dynamics have prompted a spate of industry job cuts. Société Générale announced Tuesday it would slash 1,600 jobs and shutter its OTC commodities business after missing financial targets. Nomura cut more than 100 jobs last week after logging its worse performance since 2008.

And a merger of scuffling German lenders Deutsche Bank and Commerzbank could lead to an astounding 40,000 job losses, Bloomberg reported this week.

US banks have likewise orchestrated pullbacks. JPMorgan announced in late March that it would cut hundreds of jobs in its asset and wealth-management division following a staffing review.

Elsewhere in the finance sector, hedge funds posted their best quarter since 2009 in Q1, gaining 5.9% as a group. Still, the figure dramatically trailed the S&P 500 (+14%).

The Good?

Despite those dire prognostications, there are reasons to hope financial firms’ misfortunes may be at least somewhat overstated. S&P 500 bank earnings remain in positive territory versus a year ago. And if consensus estimates are to be believed, banks’ performance will suffer less than that of the broader S&P 500.

In addition, some of the factors denting Q1 bank earnings were particular rather than structural. The US government shutdown crimped bank operations and stifled IPOs altogether. Its reopening figures to unleash a torrent of IPO activity in Q2 and beyond.

In Europe, meanwhile, Brexit uncertainty eroded M&A advisory fees. And trade tensions have heightened fears of a global economic slowdown. Pending the outcomes of political negotiations, those pressures could abate in the coming months.

In FX trading, an IMF report indicated extraordinarily low Q1 volatility was likely a product of central banks reallocating from dollars to euros.

Jefferies said investment banking activity “snapped back in March” and characterized its backlog as “‘robust.’” For the year, the KBW bank index has risen 14% — a figure comparable to the S&P 500 (+16%).

With both particular events and secular trends dragging financial firms’ earnings lower, analysts will look to banks’ revenue outlooks to parse which forces did the most damage in Q1 — and, by extension, how firms can be expected to perform in various macro contexts for the rest of 2019.

Administrative note: There will be no Curatia Analysis tomorrow as we continue our work on news feed enhancements. We’ll be back in the New York groove next week.