Bank Earnings Mixed, As Are The Price Reactions

Posted by jbrumley on April 14, 2016 11:31 PM

Big Banks Batting .500 So Far This Earnings Season

Whether the earnings glass is half-empty or half-full for the country's biggest banks (KBE) (KRE) (XLF) has yet to be decided. If Bank of America (BAC) is your proxy, then it's half-empty. If Wells Fargo (WFC) is your measure, then the glass is half-full. The former failed to meet its quarterly revenue and earnings expectations, while the latter topped its top and bottom line expectations.

The irony? WFC shares traded down in response to Wells Fargo's results, while BAC moved up.

Chalk it up to the idea of "there's always more to the story."

Wells Fargo ended up earnings 99 cents per share versus an average estimate of 98 cents. Revenue of $22.2 billion topped analyst estimates of $21.6 billion. That's down from a bottom line of $1.04 per share a year earlier, though revenue was up 4.3% on a year-over-year basis; the bank benefitted from the purchase of part of GE's lending unit.

Not surprisingly, Wells Fargo was adversely impacted by defaults on loans made to the energy sector; its loan-loss reserve was ramped up from $608 million to $1.09 billion. Oil loans aren't a significant piece of the consumer-oriented company's loan portfolio, so the drag on Fargo's bottom line has been and should continue to be minimal.

Bank of America earned 21 cents per share last quarter, down from 25 cents for Q1 of 2015, and falling short of the expected 22 cents. The top line of $19.5 billion also fell short of estimates for revenue of $20.5 billion, and rolled in noticeable less than the sales figure of $20.9 billion achieved in the comparable quarter a year earlier.

Like Wells Fargo - but more so - B of A had some trouble with loans made to oil and gas companies, though its trading and investment banking divisions also hit sizeable headwinds. Trading revenue was down 16% year-over-year, while loss-provisions grew 30% from Q1 of 2015.

Both banks did well with consumer banking and lending.

While the news pushed WFC shares back to the middle of trading range (though it could be described as a rut), BAC shares toyed with a breakout move in the wake of Thursday morning's news.

Already forming a cup-and-handle pattern -- more or less -- heading into Thursday morning's earnings report, B of A shares briefly broke above a the brim line around $13.82 during Thursday's trading; the stock still may clear that hurdle yet. If the pattern follows the typical path other cup-and-handle setups do, a break beyond that technical ceiling should incite a sizeable rally effort,  perhaps as high as the $15.60 area where the 200-day moving average line (green) currently awaits to take a shot as a resistance level.

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The bullishness from BAC is counterintuitive given the lackluster earnings results for last quarter, but veteran traders know the right trade is often  in response to what the market is doing rather than what it "should be" doing.

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