NEW YORK (MarketWatch) — Two of the country’s biggest banks, J.P. Morgan Chase and Wells Fargo, are expected to report rising profits on Friday as they kick off earnings season for the financial sector.
Long considered the bellwether for its broad reach, J.P. Morgan’s (NYSE:JPM) results will signal buoyant capital markets activity, and growing fees, for big banks, say analysts.
Wells Fargo (NYSE:WFC) , the country’s biggest mortgage originator, will give a wider picture in terms of lending profits for the industry.
J.P. Morgan Chase and Wells Fargo kick off earnings season in the financial sector
While analysts acknowledge that the environment remains challenging, expectations are that it will be a respectable quarter from the banks.
The financials sector is predicted to have the highest earnings growth rate, at 16.8%, of any sector for the second consecutive quarter in the S&P 500, according to analysts at FactSet.
“We expect the capital markets sensitive banks to fare a bit better than the regional players given some support from improved core trading and investment banking results,” said Moshe Orenbuch, analyst at Credit Suisse, in a research report.
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The market has already warmed to the two giants — shares for both stocks have seen major moves in the first half of 2013, up more than 24% year-to-date through Monday.
The J.P. Morgan gains in particular have come despite the firm being under intense shareholder and public scrutiny over the dual roles of Chief Executive and Chairman Jamie Dimon. Analysts want to know if second-quarter earnings growth can be sustained.
“What we’re watching for is the capital markets related revenues especially the trading side,” said Jeff Harte, analyst at Sandler O’Neill & Partners. “April and May were strong and then all of a sudden June looked like it was weak.”
Analysts expect the firm to report a profit of $5.6 billion or $1.44 per share for the second quarter, compared to $4.96 billion or $1.21 per share in the year-earlier period. The company is expected to report revenue of $24.96 billion, compared to $22.18 billion in the second quarter of 2012.
The recent market sell-off driven by an increase in rates in Treasury bonds could be positive for the firm’s fixed-income business, according to analysts.
The outlook by the firm for the mergers and acquisition and underwriting business will be key, given the sluggishness in the second quarter.
Lower credit losses and the release of credit reserves will be positive news.
“We expect mortgage credit to get better,” said Harte.
Bank of America Merrill Lynch analysts say the headwinds to watch out for the firm are a longer-than-expected low interest rate environment, a worsening of the European sovereign crisis, and further regulation and scrutiny of the financial industry.
Going into the next quarter, Bank of America analysts recommend bank stocks, including J.P. Morgan, with defensible revenue trends and the least likely to have earnings per share revised downwards.
J.P. Morgan’s price target remains at $57 a share for the analysts.
Wells Fargo is considered by many analysts as a super regional bank with its massive portfolio of loan originations, which are approximately a third of the total market share in the U.S.
“Wells Fargo’s quarterly earnings are not subject to swings in capital markets activities as some of the other bigger banks,” said David Hilder, analyst at Drexel Hamilton.
Up to 30% of Wells Fargo’s total non-interest income comes from mortgage banking revenue, but with higher interest rates in recent months, there are concerns that revenues will be down for the second quarter compared to the first quarter, from lower refinancing.
Another concern for analysts is the firm’s net interest margin, the difference between what the bank earns on loans and what it pays depositors.
The capital markets and investment banking arm, approximately 30% of the non-interest income for the bank, is expected to be strong by analysts, given the run-up in the stock market.
Wells Fargo is expected to report net income of $4.98 billion, compared with $4.4 billion the year before.
The firm is expected to report a profit of 92 cents per share, according to analysts surveyed by FactSet, compared to 82 cents for the same period the year before.
The country’s biggest mortgage lender is expect to report revenue of $21.17 billion for the first-quarter, compared with $21.28 billion the year earlier.