Financial stocks got a bit of a spring in their step after hours on Thursday before a critical earnings day on Friday.
Some of the nation's largest banks, including JPMorgan Chase (JPM) Citigroup (C) , PNC Financial Group (PNC) Wells Fargo & Co. (WFC) , and Bank of America Corp. (BAC) , will report their earnings Friday morning, giving investors insights into the health of the U.S. banking industry.
Shares of the banks rose slightly Thursday evening after a brutal day on Wall Street that saw each fall by 2% or more.
For example, JPMorgan, which dropped 3% to $108.13 during regular trading, rose 1.17% after hours. Citigroup, which declined 2.24% to $68.38 on Thursday, rose nearly 1% after hours.
The overall dip in bank stocks is peculiar given that rising interest rates are generally viewed as positive for financial institutions. But analysts are not visibly concerned for now.
RBC Capital Markets analyst Gerard Cassidy predicted that earnings season for the financial stalwarts will be unremarkable.
"On a sequential basis, we expect higher net interest income, lower non-interest income, higher provision expense and lower non-interest expenses to result in relatively flat median EPS growth," he wrote in his earnings preview.
Leaning on Loans
Loans will be a pivotal piece of the picture for banking stocks Friday morning, as the Federal Reserve's action raising interest rates off of their historic lows has made loans moderately less attractive to businesses and consumers.
It also impacts the market for homebuilders and construction companies given their diminished interest in taking out loans for projects.
Still, Cassidy expected moderately positive results.
"We expect the modest sequential loan growth to be driven by commercial real estate (CRE), residential mortgage loans and consumer loans," he wrote.
He expects to see a 1.6% increase in loan growth year-over-year.
A Look at Deposits
Deposits, much like their compatriots in loans, come with an asterisk.
Banks should see an increase in deposits given the contractionary policy of the Federal Reserve at this time. As interest rates rise, banks will draw more money in and thus have larger capital bases.
But the banks will need to pay out higher rates of return to depositors, which can cause a slight drag on earnings.
Banks will need to show that they have more than offset this impact in order to remain in the market's good graces.
Management Must Reassure Skittish Investors
Of course, given current market conditions and worries over a continued downturn, bank executives will play a crucial role in pacifying investor concern.
Since the U.S. financial crisis 10 years ago, banks have become a bellwether for the financial markets and the economy.
"We continue to believe that the macro environment and fundamentals for the banks remain positive and that investors should overweight the bank stocks," Cassidy said.
But it will be important for bank CEOs to focus on the positive aspects of their institutions' business in order to reassure investors, whose nerves have been frayed by a volatile week.
Cassidy recommended owning JPMorgan, Citigroup and PNC Financial. Jim Cramer and the AAP team hold a position in Citigroup and JPMorgan for their Action Alerts PLUS Charitable Trust Portfolio .