Dump Bank Stocks?
Dear Rich Lifer,
Second-quarter earnings season began this week and big banks and there’s a lot to unpack
Bank stocks have largely outperformed this year, with the SPDR S&P Bank ETF (KBE) up 20%, topping the 16% gain in the S&P 500.
And while trading in recent weeks has been touch and go, banks still passed the Federal Reserve’s stress test last month.
Right now, the average bank in the S&P 500 is trading at two times tangible book value — the value of a company’s tangible assets divided by its current outstanding shares.
Let’s take a look at each of the big banks that have reported their earnings so far and make some predictions about which stocks are set to hand investors big gains in the coming months…
JPMorgan Chase More Than Doubled Its Profits
JPMorgan Chase, the country’s largest bank by assets, beat analysts’s earnings expectations. The bank reported a profit of $11.9 billion in the second quarter, up from $4.7 billion a year earlier.
Its earnings per share landed at $3.78, and revenue hit $30.5 billion — compared with $4.69 billion or $1.38 per share a year ago. These earnings beat analyst expectations of $3.20 a share.
Despite the profit gains, revenue fell 8% to $30.48 billion from $33.08 billion a year ago. This decrease was largely a result of depressed lending margins and lower trading revenue.
Regardless, this number was still higher than the analyst expectation of $29.97 billion in revenue.
The discrepancy between profit and revenue can be blamed on the economic turmoil of 2020 when JPMorgan set aside $10.47 billion to prepare for a wave of loan defaults in anticipation of the pandemic ruining the economy.
Now, the bank is freeing up pandemic loan-loss reserves ($3 billion has been released so far), which is helping boost the bottom line. JPMorgan is seeing its customers spending more on dining and travel and borrowing more for auto loans and mortgage originations.
Jamie Dimon, JPMorgan’s chief executive, told analysts, “Their house value is up. Their stock value is up. Their incomes are up. Their savings are up. Their confidence is up. The pandemic is kind of in the rearview mirror, hopefully.”
Goldman Sachs: A Sign Profit Increases Are Leveling?
Another big bank that had cause to celebrate was Goldman Sachs, which reported quarterly profits of $5.49 billion on revenue of $15.39 billion. This profit was $2 billion more than analysts expected!
Compared to last year, Goldman’s earnings were huge. But remember, the year-ago earnings were destroyed when the bank paid billions in fines due to the foreign bribery scandal known as the 1Malaysia Development Berhad fund (1MDB).
Current earnings for Goldman are small compared to first-quarter earnings. This is a sign for some investors that big banks may be leveling out after the highly profitable period of trading that took place over the past year.
While consumer activity has increased, both JPMorgan and Goldman showed only modest growth in terms of borrowing.
Alison Williams, an analyst at Bloomberg Intelligence, commented, “Investors need more evidence of a potential improvement in loan demand to boost confidence.” With interest rates and borrowing low, it limits the amount banks can make from loans.
Despite this, Goldman and JPMorgan seem bullish on the economy and assume the rising inflation will lead to higher rates and more profits for banks.
Bank of America: Mixed Bag
The nation’s second-largest bank, Bank of America, announced its earnings on Wednesday, and the results were mixed.
The bank reported earnings of $9.2 billion, or $1.03 per share, up from $3.53 billion a year earlier.
This number was also well ahead of the 77 cents analysts projected and the 37 cents per share the bank earned in the year-ago quarter.
Similar to JPMorgan, these exciting gains were due mostly to the bank’s decision to release $2.2 billion of reserves it had set aside during the coronavirus pandemic to protect against potential defaults.
Despite these gains, revenue declined 4% to $21.5 billion from the year-ago quarter because of the impact of low interest rates and a drop in trading activity. This makes Bank of America the only bank to have come in under analyst predictions, which were $21.8 billion.
As a result, Bank of America’s stock fell more than 4% in morning trading on Wednesday, making it the worst-performing stock in the S&P 500.
With trading revenue down, investors now have their eyes on loan growth. Average loans and leases at Bank of America were $889 billion, 2% higher than the previous quarter, so we will have to see if this trend continues in a positive direction.
Citigroup: Defying Expectations
Citigroup surpassed all expectations when it reported earnings of $6.2 billion, or $2.85 per share, on revenue of $17.5 billion! Analysts had anticipated only $17.2 billion of revenue and earnings of $1.97 per share.
And although revenue fell 12% to $17.47 billion, it still exceeded analysts’ predictions of $17.22 billion.
Chief Executive Jane Fraser announced, “The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising.”
Upon the positive news, Citigroup stock increased 1.6% in premarket trading.
Like most of the other banks, Citigroup noted that the drop in revenue was due to decreased trading activity. Also like other banks, Citigroup freed up $2.4 billion in loan-loss reserves, which helped in boosting profits.
Analysts and investors have been watching Citigroup ever since federal regulators ordered the bank to revamp its risk-management system. The order came with a $400 million fine, which caused worry about costs increasing.
However, Citigroup stock still trades below tangible book value, meaning it definitely has a high amount of potential for an investment opportunity.
Believe it or not, we still have a few banks to cover, including Wells Fargo and Morgan Stanley, so stay tuned as we continue to dive into the earnings reports and bring you investor perspectives on each bank.
To a Richer Life,
The Rich Life Roadmap Team