Earnings season kicked off last weeks, with the nation’s biggest banks up first to bat.
JPMorgan (NYSE: JPM) and Citigroup (NYSE: C) kicked things off with earnings beats last Tuesday. The former posted a third-quarter profit of $9.44 billion, or $2.92 per share, versus estimates for $2.23 per share, fueled in part by better-than-projected trading results.
“The corporate and investment bank continues to be a big driver of firm performance,” said JPMorgan CEO Jamie Dimon in a statement. “We maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes.
Citigroup, meanwhile, reported earnings per share of $1.40 on revenue of $17.3 billion, beating analysts’ estimates for earnings of $0.93 per share on revenue of $17.2 billion.
“We continue to navigate the effects of the COVID-19 pandemic extremely well,” Citigroup CEO Michael Corbat said. “Credit costs have stabilized; deposits continued to increase.”
Goldman Sachs (NYSE: GS) continued the march of earnings beats on Wednesday, posting record earnings of $9.68 per share on $10.78 billion in revenue, compared to Wall Street expectations for earnings per share of $5.57 on revenue of $9.46 billion.
“Our ability to serve clients navigating a very uncertain environment drove strong performance across the franchise, building off a strong first half of the year,” said Goldman CEO David Solomon in the company’s earnings release.
But it wasn’t all good news on the bank earnings front.
Bank of America posted earnings per share of $0.51, just edging above expectations for earnings of $0.49 per share, but fell short of revenue estimates of $20.8 billion reporting $20.45 billion. While Wells Fargo reported earnings of $0.42 per share on revenue of $18.86 billion, versus estimates for earnings per share of $0.45 on revenue of $17.978 billion.
While all of these banks largely fared better than feared last quarter, investors are still unwilling to shake off their fears about the path of the economic recovery in the U.S., and thus their hesitancy to bet on big banks.
Still, as economic data continues to surprise to the upside in terms of housing and consumer spending, other areas continue to show weakness and banks’ strong reserves aren’t allaying investors’ fears, especially for those banks that are more exposed to persistently low interest rates and potentially significant loan losses.
“The financials have represented a glass half full, half empty investment with the markets believing the worst is over but not necessarily convinced that they are in a recovery,” said Sean Darby, global equity strategist at Jefferies.
Darby added that “overly restrictive” terms under the Fed’s Main Street Lending Program have made banks reluctant to lend and that banks would face a better operating environment if those restrictions were relaxed.
Analysts at UBS said in a note this week that it’s likely to take six to nine months for investors to warm up to the banking sector if given evidence of a pickup in loan growth and higher interest rates. They also added that more fiscal stimulus—which is still looking iffy—as well as a COVID-19 vaccine would of course attract more investors to the sector.
“With valuations quite low, we think downside risks for the sector are minimal,” David Lefkowitz, head of equities Americas at UBS, said in the note.
Given that, there are a few names in the banking sector that look like an opportunity now as they should do well in the current environment and beyond.
Wolfe Research executive director Steven Chubak said Morgan Stanley (NYSE: MS) looks like a winner right now, especially after it delivered an earnings beat last Thursday. The firm said profit jumped 25% year-over-year in the third quarter to $2.72 billion, or $1.66 per share, exceeding the $1.28 per share expected by analysts.
Morgan Stanley’s trading division topped analysts’ estimates, driven by a 35% jump in fixed-income revenue.
“We delivered strong quarterly earnings as markets remained active through the summer months, and our balanced business model continued to deliver consistent, high returns,” said Morgan Stanley CEO James Gorman in the earnings release.
Chubak also likes JPMorgan for its positive trends in consumer fees and flexibility with expenses.
While Chubak is less optimistic on Wells Fargo shares, he encouraged investors to stay open-minded on the stock, writing, “In our view, this is merely a question of timing as the expense opportunity is clear… and while shares will likely remain rangebound for the next couple of months, we see risk / reward as very compelling at about 70% of [tangible book value] and would encourage investors to stay the course.”