By  JJ Kinahan From Seeking Alpha

Summary

More big banks will be riding the early-earnings train again next week when Morgan Stanley and Bank of America let Wall Street know just how tough their Q4s played out.

MS already has put Wall Street on notice that Q4 was a rough one, analysts point out.

BAC’s Chief Executive Brian Moynihan may have set the stage when Street analysts say he told investors last month that all was well.

More big banks will be riding the early-earnings train again next week when Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) let Wall Street know just how tough their Q4s played out. Again, Street analysts say they’re expecting anemic results from fixed-income trading coupled with the overall challenges in the economy, and a rocky stock market overall.

But what Street analysts really want to know is what impact, both good and bad, these banks expect from potential interest rate hikes and vulnerability to China’s economic woes, among other imminent issues.

In their reports out Friday morning, rival banks issued mixed earnings results. Citigroup (NYSE:C) reported a jump in earnings as its legal fees fell relative to comparable quarters. Revenue also rose at the third-largest U.S. bank by assets. Revenue rose 3% to $18.46 billion from $17.9 billion a year ago, the company’s report revealed. Meanwhile, Wells Fargo (NYSE:WFC) topped Street expectations with a flat profit performance relative to a year earlier, but its $21.6 billion in revenue was below the Street’s expected $21.8 billion. Company comments pointed to the dent of falling oil prices on its commercial loans to the energy sector.

Morgan Stanley’s Rough Patch

MS already has put Wall Street on notice that Q4 was a rough one, analysts point out. In December, the New York-based bank said it was taking a $150 million quarterly charge and eliminating 1,200 jobs to offset the hits from fixed-income trading and other issues.

The bank already had said Q4’s trading climate wasn’t a whole lot different than Q3, when fixed-income revenues plunged 42%, according to financial media coverage. As a result, analysts reporting to Thomson Reuters now expect earnings to fall 10.3% on a year-over-year basis, to $0.35 a share. In tandem, top-line sales are projected to drop 3.6% to $7.7 billion, they forecast.

Figure 1: Money Flowing Out?

Morgan Stanley’s shares gave back 16% last year and already are diving another 16% since the beginning of the year through Wednesday. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Given that the stock has already suffered from such wide moves, the potential earnings-related share move in the stock is a narrow 1.5% in either direction, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. As for implied volatility, while most banks are trading in the mid-range of historical percentiles, MS is hovering in a higher 73rd percentile. In fact, the company’s historical range is in the 70s.

Options activity has been more muted, with some notable call option buyers at the in-the-money 27 strike. Earlier in the week, put option purchases were notable at the 25 strike.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

BAC’s Cost-Cutting Results

BAC’s Chief Executive Brian Moynihan may have set the stage when Street analysts say he told investors last month that all was well. “There’s nothing new here,” Moynihan said, as reported in the International Business Times. “The fourth quarter is always quieter. Do we wish there was more activity? Yeah.”

BAC has made public many notable changes in the last few years by cutting staff and trimming its business. According to Bloomberg’s calculations, the bank has slashed its headcount by 75,000 in the last four years.

As a result, Street analysts expect BAC to turn in per-share earnings that are 4% higher than they were a year ago, at $0.26, on revenue that’s also swelled by 4.5% to $19.8 billion.

BAC’s shares retreated some 6% last year but are down more than double that since the beginning of the year. Like MS, wide stock movement so close ahead of earnings helps explain the tame potential 2% move up or down priced in, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. Implied volatility is at the rather hefty 75th percentile. BAC tends to be one of the most heavily traded stocks in options, and there’s been a pick-up in action in both call and put options at the 15 strike.

Figure 2: Sector’s Sting?

Bank of America’s shares retreated some 6% last year but are down more than double that since the beginning of the year through Wednesday. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before investing.

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