The biggest banks have reported earnings – and investors can be forgiven if they don’t have the opportunity. The answer may be how much uncertainty they are willing to embrace.
Analysts warned that the quarter would be “sluggish” and “misleading” and banks were not disappointed. There were things we expected – an increase in trading activity and an increase in loan-loss provisions – but to ensure there was a wide spread in performance between commercial banks and investment banks, but also between individual banks.
JPMorgan Chase (ticker: JPM) was first out of the gate, and when it undermined Wall Street with its trading profits, the bank had to put $ 10.5 billion aside to cover potential bad debts. CEO Jamie Dimon said cautiously on the economic recovery during an analyst call, telling investors that the bank was “prepared for the worst.” Nevertheless, JPMorgan stock managed to end the week up 2%.
The rest of the big banks were not so lucky. Citigroup (C) was also helped in the business, but still saw a 73% drop in profits. Bank of America (BAC) had fewer provisions than loan-loss, but traders were concerned about the bank’s falling net interest income, which could be a problem for a while due to low interest rates. Citigroup’s stock fell 4.6% for the week, while Bank of America dropped 3.3%.
Pure-play investment banks, with their smaller loan books, were expecting better performance from more rate-sensitive money-center banks — and they did. But perhaps some expected the gap between Morgan Stanley (MS) and Goldman Sachs Group (GS) to be as wide. While Goldman Sachs’ profits were flat compared to the year-ago quarter, litigation and regulatory expenses totaled $ 945 million – Morgan Stanley saw quarterly revenue and profits at record levels. Its performance was so good that CEO James Gorman claimed the health of its dividend at a time when other banks were struggling to cover themselves. Goldman’s stock rose 2.9% last week, while Morgan Stanley’s rose 5.2%.
Given that setup, attending Morgan Stanley and Goldman may seem attractive, but even they suffer from uncertainty as management said that trading activity, while strong, has started tempering. Pipelines for deal activity are also low and expected to remain low while the economic situation is uncertain.
It may be time to embrace uncertainty and consider Wells Fargo (WFC), which is the most uncertain of uncertainty, and the worst performance of big banks this year? Shares are down by 53% in 2020, while SPDR S&P Bank Exchange Traded-Fund (KBE) is down by 34%. It would be easy to call Wells Fargo’s earnings a disaster, even knowing ahead of time that they would be bad. Reason: Wells Fargo told investors after the Fed stumbled in its annual stress test that it would have to cut its dividend. And what was a cut from 51 cents to 10 cents was a drop of 80% and below the 25 cents that analysts had expected. Wales also reported its first quarterly loss since the last financial crisis as it created reserves of $ 9.6 billion.
The problems were compounded by the fact that the bank is still in the regulatory doghouse following its fake-account scandal and operating under a $ 2 trillion asset cap, which was only temporarily lifted by the Federal Reserve so that She could participate in the Pay-Protect Protection Program. All banks must contend with low interest rates and the ability to balloon loan losses; Wales has fewer levers for development.
But Wales does not have some other banks: to fix the problems. Wells Fargo admitted underperformance because of his prior misdeeds. On a call with analysts, recently appointed CEO Charlie Scharf said, “We are responsible for the situation we are in.” “We also recognize that we have been unskilled for a very long time, and we will begin to take decisive action, none of which will affect our risk and regulatory actions to increase our margins.”
Scharf said the bank wants to cut spending by about $ 10 billion, noting that it is less efficient than peers and adding that “third party spending here is extraordinary. Things we trust outsiders for Do, they are beyond anything I’ve ever seen. “
Some analysts are beginning to see signs of progress. Evercore ISI analyst John Panchari noted that Wales is taking decisive steps to conserve capital and cut spending. Panchari writes, “The battle is likely to be long and the revenue headwine remains a dull factor, but we believe the tide is changing the fundamentals of Wales.”
Wells Fargo’s stock is also cheaper relative to its peers. It trades 1.6 times for JPMorgan Chase and 0.8 times tangible book value compared to Bank of America’s 1.2. Edward Jones analyst Kyle Sanders writes that in order to change, the bank needs to make progress towards exiting under the asset cap and cutting its spending. “A talented management team (which we believe they have now) and time are needed to fix these issues,” he writes.
Certainly, there is no guarantee that Wales can make a change quickly. But if you’re looking for a comeback story, there’s Wells Fargo.
Write Carlton English at [email protected]