Analysis: Is the Banking Sector Poised for Rebound in Q1?

The European and US banking sectors have been amongst the hardest hit of any industry in 2016. Heading into 2017 most lenders’ fortunes looked equally dire, given a litany of industry headwinds, Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Read this Term, and the logistics of restructurings. However, the early returns so far in 2017 look quite positive, with financials now reporting Q1 earnings that are beating street estimates.

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The end of 2016 showed most investors – and in less fortunate cases employees – what most of us already knew, that the banking sector was facing an existential crisis, shackled by diving revenues and profitability. Lingering Brexit woes only added a layer of turmoil to this quagmire, namely in one of the nexuses of the financial world, London.

Nearly every bank has seen some sort of job cuts recently, with many lenders opting to shed high labor-cost jobs such as back-office and IT roles, in many cases offshoring them altogether to Asia. London has been the hardest hit, losing thousands of jobs with the likes of Deutsche Bank, Standard Chartered, and Barclays all jettisoning sizable portions of their workforce.

It wasn't supposed to be this way

In addition to this trend, most lenders are in the early stages of multi-year restructuring plans, typically associated with high degrees of turnover and incurred costs given transfers of business, etc. However, Q1 2017 so far has shown that the doom and gloom may be overblown, if at least for the first quarter of the fiscal year.

Earlier this week, JPMorgan and Citi both reported positive earnings. While being notable for their rebound from prior quarters, the two lenders did notch a rebound in specific segments left for dead virtually one quarter ago. Fixed income contributed strongly, notably in the case of Citi, helping boost its revenues for the quarter.

The narrative was largely similar with JPMorgan – however, many are now looking across the Atlantic to its UK counterparts, with the likes of Barclays, Lloyds, RBS, and others looking to also publish their Q1 filings.

Smooth sailing?

One thing working in the favor of European lenders is the lack of debilitating fines that have handicapped their earnings in years past, i.e. Libor Libor Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Read this Term and FX rate rigging episodes. The industry has been devoid of any major scandal in Q1 2017, which historically has sapped billions in revenue streams on an aggregated basis.

Still, each lender is not out of the woods yet, respectively grappling a series of issues and domestic transitions. The first filings will be released by the end of the month, though if the earnings are anything like their US counterparts, investors could be in for a pleasant surprise.