There are high expectations for ASX banks ahead of next month's reporting season and the Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price could be a standout.
The analysts at Macquarie Group Ltd (ASX: MQG) extrapolated the strong results from US banks. It believes the ANZ Bank share price could be the biggest winner on the back of the US trend.
Banks in the US have posted around 14% year-on-year growth in trading income for the first quarter of calendar 2020.
US profits bolstering earnings expectations for ASX banks
This is a significant indicator for ASX banks. Trading and markets income are one of the most difficult things to forecast for our sector.
"While Australian banks composition of markets and trading income differs from the US banks with a more significant proportion of revenue coming from rates and FX, recent trends from US investment banks suggest further upside risk in markets income in 1H21," said Macquarie.
"Our analysis highlights that ANZ appears to be more leveraged to the trends observed from offshore peers."
Why ANZ Bank has most to gain
This is because ANZ Bank has a larger global markets business compared to the other three big banks.
Macquarie calculated that there is around a 90% correlation between ANZ Bank's income relative to US banks.
This doesn't mean that the National Australia Bank Ltd. (ASX: NAB) share price and Westpac Banking Corp (ASX: WBC) share price won't benefit from the upbeat trend in the US.
But their income is less correlated to the US, while Commonwealth Bank of Australia (ASX: CBA) is only slightly correlated, added Macquarie.
ASX banks getting an earnings upgrade
For this reason, the broker upgraded ANZ Bank's FY21 cash earnings forecasts by 1.9%. The other three banks got a modest upgrade of between 0.3% and 0.6% each.
On the other hand, I suspect the favourable US banking results is even better news for the Macquarie share price.
Afterall, our home-grown investment bank has an even larger exposure to global markets than our domestic banks.
The big four generate most of their earnings from home loans. This is why investors already have high hopes for ASX banks heading into the May reporting season.
As it stands the share prices of ASX banks have outperformed the S&P/ASX 200 Index (Index:^AXJO) in the past few months.
Skyrocketing residential prices and a big jump in demand for mortgages are big profit tailwinds for ASX bank shares.
