Big Bank CEOs: Smooth Sailing Ahead
Dear Rich Lifer,
Bank stocks have been on a roll since the pandemic hit.
Yesterday, we evaluated the earnings reports of four of the six big banks. The takeaway? Across the board we saw an increase in earnings due to banks freeing up loan-loss reserves.
While each bank had a varying degree of success when it came to revenues, another similarity among the banks was that trading activity dropped significantly.
Today, we will take a look at two more big banks: Wells Fargo and Morgan Stanley.
The results don’t just shed light on the financial sector. They also give us some clues about what’s really happening in the economy…
Wells Fargo: Emerging Victorious
The San Francisco-based bank Wells Fargo reported its highest revenue since pre-pandemic times. Analysts had expected $17.76 billion in revenue, but the bank blew predictions out of the water when it reported $20.27 billion in revenue — an increase of 11% from last year.
Their success is due to fees and other non-interest income, which rose 37% from last year, along with higher valuations on its venture capital and private equity investments and quadrupled mortgage banking income. These factors combined to make Wells Fargo the only lender among the biggest four to have an increase in revenue.
These postings are incredible news for Wells Fargo, which has been working to repair its business after its fake accounts scandal five years ago led to revenue drops and a blow to its reputation.
Following suit with other big banks, Wells Fargo released $1.64 billion of its loan-loss reserves, which helped boost its $6.04 billion in second-quarter earnings or per-share earnings of $1.38.
The lender is still contending with more restrictions than other big banks, including a three-year-old cap on its growth as a penalty for the fake accounts scandal.
As a result, the bank has focused on cutting costs by letting go of employees, closing branches and decreasing its office space. And their efforts seem to be benefiting the company, with non-interest expenses decreasing by 8%.
The good news resulted in Wells Fargo stock rising 4%, adding to its incredible growth from the year already (the stock has skyrocketed 49% — the largest increase of the big banks).
Morgan Stanley: The Lone Lender
Morgan Stanley, meanwhile, reported second-quarter profits of $3.51 billion, or $1.85 a share, a 10% increase.
The profits, due mostly to an increase in fees from deal-making and advising wealthy clients, were based on revenue of $14.76 billion. This profitable quarter beat analyst’s expectations by almost $1 billion!
Revenue at the wealth-management division, which increased 30% to $6.1 billion, can take most of the credit for the strong quarter.
The rise of the do-it-yourself investor also helped boost revenue. Morgan Stanley brought in $71 billion in new assets from investors who used the bank’s E*Trade brokerage, clients of Morgan Stanley’s financial advisers, and employees of companies where Morgan Stanley administers stock plans.
Chief Executive James Gorman explained, “Every now and then in business you look and you sort of see a wave coming and you catch the wave, and it’s a beautiful thing.”
Like other banks, Morgan Stanley also reported a decline in trading.
But unlike other banks, it actually boosted lending by 21% to $320 billion outstanding. The number of loans backed by clients’ securities portfolios and other collateral, a popular product among wealthy Americans, increased 43% to $75.8 billion.
Morgan Stanley will be a good bet for investors because of its recently announced plan to double its quarterly dividend and buy back up to $12 billion of stock in the following year.
Now that we have covered the big banks, let’s take a look at what the reports tell us about the overall state of the economy…
What Big Banks Reveal About the Economy
There are a few key takeaways we can deduce from the second-quarter earnings reports from the big banks.
- People Aren’t Borrowing:
Spending has increased significantly in the last few months, particularly in June, as restrictions ease and the economy opens back up. But since many Americans have increased their savings because of stimulus packages, not many people need to take out loans. Instead, they are paying off their credit card bills without having to borrow.
- The Housing Market is Still Hot
When determining how hot the housing market is, analysts look at originations numbers, the number of people applying for a mortgage or home loan. Banking reporter David Benoit explained that “Both J.P. Morgan and Wells Fargo talked about originations being up a whole lot.”
Buyers are also bidding up the price of homes, and many are being priced out of the market. This is causing concern for some banks, such as JPMorgan Chase, whose CFO Jeremy Barnum stated, “We’ve seen so much home price appreciation that maybe affordability starts to be a little bit of a headwind.”
- CEOs are Confident in Recovery
JPMorgan and Goldman Sachs posted record fees from helping companies do deals. In fact, JPMorgan reached an all-time high in deal fees.
This shows that corporate executives are confident about the recovery of the economy. Benoit observes, “They’re out there spending. They’re ready to transform,” and this is where the banks come in to help facilitate deals and make profits through fees.
- The Future of Trading is Uncertain
The markets have calmed significantly since the hectic trading of last year. Markets are still busier than they were pre-pandemic, but trading revenue is not expected to hit prior levels anytime soon. Now the question becomes: where do the markets level out?
Goldman analysts explained, “We believe that this summer represents the acid test for whether normalized trading levels will be higher than pre-pandemic.”
So, although we have learned quite a lot from the big banks, this summer will clearly be a test of what we can expect for the future of the markets.
To a Richer Life,
The Rich Life Roadmap Team