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Bank Earnings Preview: What Investors Should Know

Tuesday, October 12, 2021 03:45 PM | Neal Farmer
Bank Earnings Preview: What Investors Should Know

Earnings season is upon us once again.

Major financial institutions are set to kick off the fun later this week. Most of the big name banks such as JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Morgan Stanley (MS), and Goldman Sachs (GS) among others are set to report quarterly earnings.

How Have Banks Compared to the Market?

Banks have enjoyed a strong 2021 so far as traders bet on lenders. The Federal Reserve is expected to soon scale back its asset purchases and eventually raise interest rates, which should be good for banks. Perhaps even better for banks is the fact that the economy is expanding at a rate that the Fed feels comfortable moving toward a more normal set of monetary policies.

The rise in banking stocks is clearly evident when comparing the KBW NASDAQ Bank Index to the S&P 500. So far this year the KBW Index has risen nearly 39% while the S&P 500 has “only” gained about 18%. Markets have enjoyed a strong year (although have cooled off over the past month) and the financial sector has so far been one of the biggest winners. The potential for higher rates and rapid loan growth has many investors bullish on financial services firms.

Where are Banks Now?

Banking is an extremely cyclical industry and investors who expect the economy to continue its recovery as inventories are rebuilt and supply chain problems are resolved don’t have to look much further than the world’s largest financial institutions for stocks to bet on. This week’s quarterly results will give plenty of insight into how these banks are performing and how well the economy is truly recovering from the pandemic. Additionally, investors can see which firms are positioned to do the best going forward.

Bank of America and JPMorgan Chase are both well above their historical averages in terms of valuation, but remain far cheaper than most of the market. Morgan Stanley, meanwhile, has pulled back recently after being downgraded by both Oppenheimer and Berenberg. Both analysts cited current valuations as reasons for the downgrades. In a market that is pretty overvalued by any traditional metrics, banks are in the same position but look a lot better than most equities.

Anyone looking for stocks that are near or even below where they were before the pandemic might be interested in Citigroup or Wells Fargo. However, these two have taken very different paths this year with Wells Fargo rising nearly 60% so far while Citigroup has risen just 19% and barely outperformed the overall market. These numbers are the best and worst respectively among the six biggest banks but have resulted in them both being right near pre-pandemic levels for each. The two banks may not be as overvalued as the other four, but the slow and weak recovery says a lot about the structure of the companies and expectations going forward.

Meanwhile, Goldman Sachs and Morgan Stanley are both up roughly 45% this year and are far above where they were before the pandemic (MS stock is nearly double what it was in February 2020). Both stocks started to really surge back in November of last year and have not let up while Bank of America and JPMorgan rode that wave as well until cooling off this summer.

Earnings Expectations

The big six are all expected to report earnings per share (EPS) above where they were a year ago with Goldman Sachs, Morgan Stanley, and JPMorgan Chase estimates just slightly above the previous year. Wells Fargo is expected to more than double its EPS (0.94 versus 0.42) while Bank of America and Citigroup estimates are for a moderate bump in earnings compared to last year. Overall banks more heavily weighted in investment banking (JPM, MS, GS) are expecting slower growth over the past year compared to more retail and commercial based banks (WFC, BAC, C).

In addition to just the headline numbers it will be interesting to see if banks continue to release loan loss reserves that were set aside for expected defaults as a result of the pandemic. Changes or stabilization in net interest margin (NIM) will also be of note as many analysts expect it to rise along with higher benchmark interest rates.

Wrapping Up

Banks are a strong bet right now in this market as many assets remain overvalued but financial institutions are still in position to benefit strongly from the economy continuing its recovery from the pandemic and some of the short-term pressures on supply chains and inventories caused by it.

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