US banks are generally expected to post dismal results when their earnings season gets under way next week, but some analysts say to dig deeper: the fine print in the results, and what bank bosses say, could actually help these long-suffering stocks bounce back.

Four of the S&P 500’s top-weighted banks, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup, are set to report grim first quarter revenues and profits starting on Wednesday. Analysts are expecting first quarter reports in the financial sector to show a 9.2-per cent decline in earnings and a 0.2-per cent rise in sales.

The financials have been the worst performing S&P 500 sector this year, down 8 per cent as the broader S&P 500 is flat.

Bank shares are cheap compared to the rest of the market. Companies in the S&P financial sector are selling at roughly 12.8 times estimated earnings over the next 12 months, compared with 16.7 times forward earnings for the broader S&P 500.

Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York, who said he’d be “very surprised to see positive earnings,” said he will look beyond the numbers in case he can glean optimistic forecasts from bank managers. His firm is modestly overweight on financial services.

Drained by energy sector The sector has remained troubled since the global financial crisis as banks have battled prolonged low interest rates, faced an onslaught of pricy reform mandates, and, more recently, were hit by lending to risky oil and gas companies.

Even at seabed-low prices, it won’t be easy for banks to prove their shares are a good buy. Investors will look for notes about the type of exposure banks have to the energy sector, which is facing its first quarterly loss in at least a decade, according to Thomson Reuters data, and is expected to be the biggest drag on the S&P 500.

Bank shares could become more appealing if the companies can show a relatively healthy energy portfolio or that they are losing less money than expected on energy loans. Their forecasts might also strengthen if oil prices are, in fact, settling, as has seemed to be the case recently.

Investors will also look for signs of strength in banks’ investment and trading arms, said Nomura senior analyst Steven Chubak. An incentive to buy could include commentary about an increase in the demand for loans and banking products. “That could propel their shares higher,” Forrest said.

Earnings week begins in earnest across sectors on Monday, with metals company Alcoa scheduled as the first to report. Looking at the broad S&P 500, analysts’ forecasts have been reduced so low that many companies are likely to beat estimates despite frail earnings.

- Laila Kearney

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