When the big U.S. banks report earnings over the next four business days, investors and analysts will focus on three things: loan growth, expenses and activity in the capital markets.
Third-quarter earnings season begins in earnest this Friday as JPMorgan Chase, Citigroup and Wells Fargo are set to post results before the bell. Given banks' involvement in many aspects of overall business activity, their earnings are watched as an indicator of U.S. economic growth.
"I think you're going to learn a lot about the strength of the U.S. economy tomorrow," said Marc Chaikin, CEO of Chaikin Analytics.
"You'll get a feel for the housing market based on what they're saying about mortgage applications," he said.
Bank of America is set to report next Monday, followed by Goldman Sachs next Tuesday and Morgan Stanley next Wednesday.
All eyes on Wells Fargo
However, Wells Fargo's quarterly report this Friday will likely take the immediate spotlight as the bank struggles to recover from a consumer sales scandal and continued scrutiny from authorities. John Stumpf retired as chairman and CEO of the bank Wednesday, but not all analysts are convinced the succession of well-liked Tim Sloan to the position of CEO will be enough to restore confidence in the bank.
"The main thing is, how management handles the call and how they describe the ramifications of the account scandal, how they reset expectations for fee income and how they grow the business," said Kevin Barker, senior research analyst at Piper Jaffray, which reiterated an underweight rating and $43 price target on Wells in a Thursday note.
"The big question is, how does this affect people wanting to walk in the door and get an account at Wells?" Barker said.
The bank paid $185 million in penalties for opening possibly 2 million consumer deposit and credit card accounts without customer authorization.
Where the sector stands now
For banks overall, analysts are watching loan growth as a gauge of the economic health of businesses and consumers.
"I think loan growth will really make or (break) the quarter for the bank sector," said Kelly Bogdanov, vice president and portfolio analyst at RBC Wealth Management. She expects solid loan growth in commercial and consumer real estate, and good levels of consumer lending in general.
"What we need to see is the economy continue to grow for the banks to continue to have loan growth," she said.
Another issue investors are watching in this post-financial crisis era is how the banks deal with regulation and any settlements that may come along. Banks will need to show they have enough capital on hand to pay for any potential charges, although most analysts are confident the firms are in good shape.
"I'm sure (regulation will) come up and people will ask for their insights on it," said Jeffery Harte, principal, Sandler O'Neill Partners. However, he said, "the underlying message will remain, the big banks have a lot of capital, the big banks have a lot of cash and they'll probably manage pretty well."
Harte has a hold rating on Morgan Stanley and JPMorgan Chase, and a buy on Bank of America, Goldman Sachs and Citigroup.
We expect sluggish investment banking results with modest declines year over year and double-digit declines quarter over quarter. Increased volatility has dampened the revenue outlook for mergers and acquisitions and equity capital markets.Macquarie analysts, in a research note
For these investment banks, figures on trading and corporate deal activity will stand as important indicators on the health of financial markets. The third quarter, which includes the summer holidays, is often slower than other quarters of the year.
"We expect sluggish investment banking results with modest declines year over year and double-digit declines quarter over quarter," Macquarie analysts said in a Wednesday note. "Increased volatility has dampened the revenue outlook for mergers and acquisitions and equity capital markets," the latter of which includes companies' initial public offerings.
Guidance for capital markets activity will be particularly of interest, since IPO and corporate deal activity picked up at the end of the third quarter, after 2016 started sluggishly.
I'm "looking to see whether there are continued signs of momentum into year-end," said Devin Ryan, analyst at JMP Securities, which has a market perform rating on Goldman Sachs a market outperform rating on Morgan Stanley.
"The market's been a bit more resilient recently than earlier in the year," he said.
The value of global mergers and acquisitions, excluding spinoffs, was about $860.6 billion in this year's third quarter, up from roughly $736.6 billion in the first quarter, but down from around $1.1 trillion in the third quarter last year, according to Dealogic.
Renaissance Capital expects 30 to 40 more IPOs for the rest of the year, putting 2016 on track for more than 100 deals raising a total of more than $16 billion, according to a Sept. 30 note from the firm. But many challenges for the IPO market may arise in the next few months, given the presidential election, the usual trading slowdown around the holidays and a potential interest rate hike, Renaissance said.
"Even at the high end of our estimates, the 2016 U.S. IPO market will go down as the least active year since the financial crisis and will most likely trail both 2008 and 2009 in terms of proceeds raised," the note said.
Over the last three months, financials themselves are the second-best performers in the . But the sector has struggled the whole year with moderate economic growth, lowered expectations for a U.S. Federal Reserve rate hike and one of the worst starts to a year for the U.S. stock market.