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With taxes down and rates up, big US banks expected to show strong Q2 profits


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With taxes down and rates up, big US banks expected to show strong Q2 profits

The benefits of lower taxes and rising interest rates should drive up second-quarter earnings for the largest U.S. banks, analysts say.

On average, analysts anticipate that all of the country's 20 biggest commercial banking companies will report second-quarter earnings-per-share results that are higher than a year earlier, according to an S&P Global Market Intelligence analysis. Wall Street expects 17 of those banks to report increased revenue.

Big-bank earnings season begins July 13, when JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. post results. Analysts are looking for those three companies and 15 other major banks to report second-quarter net interest margin expansion. Following several Federal Reserve interest rate hikes over the past year, many big banks have been able to boost rates on loans more than they have had to on deposits, and the widening spread between the two boosts margins and bolsters income, analysts say.

Additionally, banks are enjoying lower tax rates following a cut to the federal corporate tax that took effect this year. The top corporate tax rate was lowered to 21% from 35%, and banks have been able to push some of the savings to their bottom lines.

Sandler O'Neill & Partners bank analyst Jeffery Harte said that, for banks with large trading and investment banking operations, capital markets activity looks to have held up generally well following a solid first quarter.

"And credit quality still looks good," Harte said in an interview. "It should be a good quarter."

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Among the 10 biggest banks, only Wells Fargo is expected to report second-quarter revenue that is down from a year earlier.

Since late 2016, Wells has grappled with the fallout of a sales scandal that has hindered the San Francisco-based banking giant's ability to attract new customers and lift its top line.

A cloud of public doubt and intense regulatory scrutiny has hovered over Wells since September 2016, when authorities penalized the bank for allowing its retail staffers to open millions of phony accounts. Wells has faced a series of other customer-service troubles in the months since. Regulators this year fined the bank $1 billion for problems in its mortgage and auto operations, and the Fed ordered the bank to maintain its asset size at the level it finished 2017 — an unprecedented rebuke.

Charles Wendel, president of Financial Institutions Consulting Inc. and a longtime big-bank observer, said in an interview that Wells has the national footprint and technological savvy to right its retail ship. But he said recovery from the sales debacle has dragged on more than Wall Street had initially anticipated, and analysts are sure to pursue revenue updates from executives during the bank's second-quarter earnings call.

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That noted, Wells did join its big-bank brethren with a show of capital strength in June.

The Federal Reserve gave Wells a passing grade on its capital deployment plan. The Fed's nod backs up the bank's own assertions that, despite revenue challenges, it is on solid financial footing. It announced it would increase its dividend and repurchase more of its shares.

It joined dozens of other big banks with similar news of go-aheads from the Fed.

Analysts interpreted the results, which come out of the Fed's annual Comprehensive Capital Analysis and Review process, as affirmation that the U.S. banking industry, led by the big banks that hold a majority of its assets, is healthy and poised for growth alongside a heating economy. The Atlanta Federal Reserve estimated that U.S. gross domestic product advanced at a rate approaching 4% in the second quarter. Such an expansion, driven in part by lower taxes and ongoing deregulation at the federal level, would approximately double the rate of the first quarter.

When the economy expands and regulations ease, banks' commercial customers tend to borrow to invest in their own growth. That prospect has some analysts anticipating relatively strong loan growth in the second half of 2018, a development that could serve as a catalyst for big-bank stocks. If they can grow loans at a time when rates are rising, banks could increase interest income and further pad profits, analysts say.

The favorable CCAR results mark an inflection point for big banks, whose stocks were under pressure in the first half of 2018, Vining Sparks analyst Marty Mosby wrote in a report. Large-cap bank stocks, he said, "should begin to move meaningfully higher" toward his targeted price-to-tangible book value range of 225% to 250% over the next 12 months, up from roughly 200% for the group at the mid-point of this year.

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