Mounting loan defaults Mid-Corona – XLF a sell?
Earnings season kicked off last week with big banks like Wells Fargo, Bank of America and Goldman Sachs delivering Q3 earnings for Q3/2020 and giving some first insights into their business and revenues Mid-Corona.
While Goldman Sachs delivered some strong numbers, Wells Fargo and Bank of America disappointed.
Trading houses like Goldman outperform "classic" banks like Wells Fargo
Goldman Sachs earnings came in significantly above the expectation of $5.37 Earnings per Share (EPS) at $9.68 and revenue at $10.78 billion against $9.19 billion.
In general, it seems as if chances are high that US banks with a focus on trading continue to profit from the elevated volatility Mid-Coronavirus and before the US election.
But given recent developments around the Coronavirus lockdown, the focus in the US banking and financial sector will likely be more on those banks which are more defined by interest rates, consumer banking and commercial real estate since these will potentially paint a clearer picture on what to expect in terms of the US economic outlook.
That said, a look at Wells Fargo, one of the biggest US banks, seems to make more sense:
- Wells Fargo's total revenue of $18.86 billion was down 14 year-over-year, but slightly above expectations of $17.98 billion
- That didn't help in terms of EPS, which came in at $0.42 against an expected $0.45
- Wells Fargo "only" set aside $769 million for credit losses in Q3, down from a staggering $9.5 billion in Q2/2020 and well below a FactSet estimate of $1.76 billion
CEO Scharf told investors that "[…]The trajectory of the economic recovery remains unclear as the negative impact of COVID continues and further fiscal stimulus is uncertain[…]".
That sceptical outlook can also be seen in presented earnings from Bank of America:
- EPS was $0.51 against $0.53
- The bank set aside $1.4 billion for loan loss provisions, against $5.1 billion in Q2/2020
- Net interest income is down 17%, coming in at $10.1 billion.
With our expectation of mounting defaults Mid-Corona and a further decline in US interest rates, our outlook for the US banking sector is not very positive.
How can you trade #XLF in this environment?
This leaves us with a bearish expectation for the Financial Select Sector SPDR Fund ETF (XLF):
While the ETF is currently trading around its SMA(200), we consider the overall mode on a daily time-frame bearish if bulls can't sustainably recapture 26.00 USD, the region around the August/September highs.
A break below 23.00 USD should be considered bearish and would make a substantial stint lower to a target around the "Corona lows" of 17.50 USD in the months to come an option, with a stop-over at around 20.00 USD:
In 2015, the value of #XLF decreased by 1.74%, in 2016, it increased by 22.59%, in 2017, it increased by 22.0%, in 2018, it decreased by 13.04%, and in 2019, it increased by 31.88%, meaning that in five years, it was up by 52.3%.
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