Company / Analytics

Analytics, 15 April 2022

Big bank’s first-quarter earnings & outlook

Major US banks reported their earnings this week, giving investors a peek at how companies performed in the first quarter of 2021. Since the outbreak of Covid-19, corporate profits remained largely steady, supported by government stimulus payments and strong consumer spending. But investors are getting worried that rising inflation will end that trend.

For years, investors in the banking sector have wished the Federal Reserve to launch an aggressive series of interest-rate increases. Though this is now happening, it’s unlikely to help the stocks in the near term. The sector faces other challenges, such as a slowdown in trading and deal-making, an uncertain macroeconomic climate caused by inflation and geopolitical concerns.

Big banks reported mixed results with Morgan Stanley, Goldman Sachs and Citigroup, which were better than analysts’ expectations while Wells Fargo missed expectations.

How did major banks perform?

Goldman Sachs

Goldman Sachs first-quarter result beat analyst expectations as traders navigated a surge in market volatility sparked by the war in Ukraine. The bank reported revenue of $12.93 billion, above analyst estimates of $11.83 billion. Earnings rose to $10.76 per share, above estimates of $8.89. However, profit fell 42% to $3.94 billion, or $10.76 per share, from a year earlier on lower investment banking fees. While revenue sagged 27% to $12.93 billion, that was a full $1 billion more than analysts had expected for the quarter.

The bank appeared to have exceeded its competitors after it benefitted from the sudden market upheaval caused by the Ukraine conflict. The bank noted that the “rapidly evolving market environment had a significant effect on client activity as risk intermediation came to the fore and equity issuance came to a near standstill. Despite the environment, our results in the quarter show we continued to support our clients effectively.”

Goldman shares have fallen 15.8% this year through Thursday, compared with the 10.5% decline of the KBW Bank Index.

JPMorgan Chase

The biggest U.S. bank by assets, JPMorgan is closely watched for clues on performance on Wall Street and overall US economy. JPMorgan Chase announced that first-quarter profit fell sharply from a year earlier, driven by increased costs for bad loans and market upheaval caused by the Ukraine war.

The bank reported revenue of $31.59 billion, above the $30.86 billion analysts estimated. Adjusted earnings were $2.76 a share, compared to estimate of $2.69. Shares of JPMorgan have dropped 16.9% this year before Wednesday, worse than the 10.6% decline of the KBW Bank Index.

Wells Fargo earnings

Wells Fargo reported lower-than-expected first-quarter revenue caused by a drop in mortgage lending, though it beat earnings expectations after reducing its credit reserves. Revenue was $17.59 billion, compared to analyst estimate of $17.8. Earnings was 88 cents a share, above estimate of 80 cents. Profit dropped 20.8% from a year ago to $3.67 billion in the first quarter, Wells Fargo reported.

Unlike its peers with sizeable Wall Street divisions, Wells Fargo focuses mostly on U.S. retail and commercial banking customers. Analysts believe the bank is best positioned to benefit from rising interest rates and a rebound in loan growth – as these would boost the interest income it collects.

Shares of Wells Fargo are down roughly 3% this year, the best showing among the six biggest U.S. banks, most of which have posted double-digit declines.

Analysis and Outlook

Bank earnings this term reflect how events have rapidly changed the outlook of the industry. Just a year ago, Jamie Dimon, CEO of JPMorgan, predicted a long-running economic expansion and banks were reaping benefits as billions of dollars in loan loss reserves were released. Today, amid uncertainty, Jamie Dimon called attention to the possibility of a recession ahead.

While there may be winners and losers in the market, investors are closely watching how the industry is taking advantage of rising interest rates, which tend to fatten banks’ lending margins. Analysts anticipate improving loan growth as Federal Reserve data show banks’ loans increased 8% in the first quarter, driven by commercial borrowers.

Analysts will continue watching earnings and the S&P 500 earnings are expected to be up 6.1% in the first quarter. But the financial sector is expected to see a decline of 22.9%.

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