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The third-quarter earnings season will heat up this week, but we already have major reports from the banking sector. Last week the earnings releases were largely dominated by the Finance behemoths. Industry challenges and a strained global environment were among the headwinds that the banks needed to overcome. In fact, achieving high revenue growth was a challenge on a strong U.S. dollar and macroeconomic concerns. The Finance sector has already seen how some primes, namely J.P. Morgan (NYSE: JPM ), Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ), fared in the quarter. Citigroup (NYSE: C ), U.S. Bancorp (NYSE: USB ) and The PNC Financial Services Group (NYSE: PNC ) have also released their results. Earnings will continue to dominate headlines over some of the next trading days. The Bank of New York Mellon (NYSE: BK ), Fifth Third Bancorp (NASDAQ: FITB ) and Regions Financial (NYSE: RF ) are slated to announce results today; while Capital One (NYSE: COF ) will report on Oct 22. Indication from the finance sector is relatively more positive than certain other sectors. As the banking sector sees such active releases, it will be a prudent move to focus on Finance mutual funds as well. Finance Sector Earnings Including the morning reports as of Oct 19, 63 S&P 500 members had reported results. These account for 18.6% of the index’s total market capitalization. Total earnings for these companies are up 1% from the same period last year on 0.9% lower revenues. While 61.9% beat EPS estimates the revenue beat ratio was 28.6%. The earnings numbers are weaker than the same group of companies’ results in recent seasons. However, it was the banking behemoth Bank of America that aided the growth numbers. Easy comparisons helped the positive earnings growth, but excluding the Finance sector earnings growth dipped to negative 7.4%. Till last week, 5.9% of companies from the Finance sector that count for 24.9% of the total market cap had reported results. Earnings growth compared favorably with broader trends at 31.9% with 80% beating EPS estimates. Revenues were however down 1.9% and revenue beat ratio was 40%. Recap of the Major Banks’ Results Revenues continue to be weak as the equity market rout and the low rate environment prevail. Demand for loans remained subdued, while provision for loan losses continued to rise mainly due to lower reserve releases and increased provision for energy sector loans. However, absence of significant legal expenses, coupled with cost-control initiatives (reorganization and streamlining), helped most banks to surpass their respective EPS estimates. But, the estimates were themselves conservative after a number of downward revisions. Below we present a synopsis of earnings results from some of the behemoths: JPMorgan Chase & Co missed the Zacks Consensus Estimate though estimates were revised lower in recent days. It reported adjusted earnings of $1.32 per share, delivering a negative surprise of 4.4%. Weak trading activities primarily led to a decline in the overall profit. Citigroup beat earnings estimates by 1.6%, primarily on the back of lower legal and repositioning costs. As expected, pressure on revenues owing to a fall in fixed income market revenues was the major undermining factor. Bank of America comfortably beat the earnings estimate. Weakness in fixed income trading and lower equity investment income were the undermining factors. Lower operating expenses and negligible legal costs raised BofA’s earnings to 37 cents per share, beating the Zacks Consensus Estimate of 34 cents. Wells Fargo was able to overcome industry challenges, with its results being driven by revenue growth (up 3.3% year over year). The company’s earnings of $1.05 per share beat the Zacks Consensus Estimate by a penny. Results benefited from organic growth aided by strong loans and deposit balances. Bank Mutual Funds in Focus Going forward, the Finance sector is expected to see earnings growth of 9.6% on 3.7% lower revenues. These compare favorably with the second quarter actual numbers. In the second quarter, earnings for the Finance sector had improved 7.2% on revenue decline of 14.2%. The Finance sector is placed third, after Autos and Transportation sectors, in terms of best earnings growth forecast. On that note, let’s look at Finance mutual funds that significant exposure to banks. The favorably ranked mutual funds may offer potential investment opportunities for investors interested in the sector. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The Fidelity Select Banking Portfolio (MUTF: FSRBX ) seeks growth of capital. It invests a large share of its assets in banking companies. FSRBX invests in both domestic and non-U.S. issuers using fundamental analysis. Fidelity Select Banking Portfolio currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . Top holdings of FSRBX include Wells Fargo, U.S. Bancorp, Bank of America, JP Morgan and Citigroup. It has average EPS growth of 10.3%. Though down 1.4% year to date, FSRBX has returned 10% over the 1-year period and its 3- and 5-year annualized returns are 13.9% and 13%, respectively. The Emerald Banking and Finance Fund A (MUTF: HSSAX ) primarily seeks long-term growth through capital appreciation. Income is a secondary objective. HSSAX generally invests at least 80% of its net assets in common stocks. Emerald Banking and Finance’s managers limit the fund investment to 50 companies and the fund invests primarily in U.S.-based companies. Emerald Banking and Finance A currently carries a Zacks Mutual Fund Rank #2 (Buy). Top holdings of HSSAX include Bank of the Ozarks (NASDAQ: OZRK ), SVB Financial (NASDAQ: SIVB ), Signature Bank (NASDAQ: SBNY ) and Opus Bank (NASDAQ: OPB ). It has average EPS growth of 15.3%. While the year-to-date and 1-year returns are 11.5% and 20.7%, respectively, the respective 3- and 5-year annualized returns are 20.5% and 17.2%. The ProFunds Banks UltraSector Fund Investor (MUTF: BKPIX ) seeks daily results (excluding fees and expenses) that is one and half times of the Dow Jones U.S. Banks Index’ daily performance. This index is a measure of the performance of the U.S. banking sector. The ProFunds Banks UltraSector Investor currently carries a Zacks Mutual Fund Rank #2. Top holdings of BKPIX include Wells Fargo, U.S. Bancorp, Bank of America, JP Morgan and Citigroup. It has average EPS growth of 6.7%. Though down by 6% year to date, BKPIX has returned 12% over the 1-year period and its 3- and 5-year annualized returns are 20.5% and 13.6%, respectively. Link to the original post on Zacks.com Scalper1 News
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