Third Quarter Bank Earnings — Tricks Or Treats?

Just in time for Halloween, earnings season may haunt bank stocks, with low interest rates and high earnings estimates marking a tough hurdle to clear. That’s according to The Wall Street Journal, which on Friday (Oct. 2) reported that the same scenarios are stubbornly in place and are setting up to hit future growth.

Low interest rates are likely to continue, as they have for years, in the wake of the Federal Reserve Bank’s recent confirmation that it would not raise rates this September (and possibly even longer), a declaration that typically results in a flatter yield curve and new pressure on net interest margins, typically a key driver of bank profits.

The bond market will not be any help, with yields slipping as recently as Friday on the government debt and 10-year treasuries that now sport interest rates at less than 2 percent. So, as rates generally follow fixed government vehicles lower, banks will attract less on the instruments that they lend out.

Wall Street consensus may still be overly optimistic, reported WSJ, as net interest margins — which had slipped in the second quarter and have been estimated to stabilize in the period that just ended — could slip and not hold steady. If competition pops up among banks as they scramble for income, pricing gets hit in turn and so would margins, which would set up for a shortfall against the mid-single digit loan growth that analysts have been modeling.

Further, WSJ cautions not to count on non-interest income to prop up results, as the Mortgage Bankers Association is looking for an 8 percent decline in home loan originations in the third quarter versus the second quarter of this year. Rates and average loan amounts were both down over the summer.

Trading revenues, another source of non-core funding, are also slated to be off by about 5 percent from last year, and though revenues derived from equities may indeed be positive, they will not be enough to offset the impact of lower interest rates and other macro-impact. That might jeopardize bank stocks, which are trading relatively higher (in terms of return) than the overall markets.

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