Company / Analytics

Analytics, 16 July 2021

Summary of US bank earnings and outlook this week

Major US banks began reporting the second-quarter earnings this week. JPMorgan, Citigroup, and Wells Fargo kicked off the flurry of earnings reports that beat expectations thanks to better-than-anticipated loan losses.

The bank earnings come at a time when banks still face an extremely low interest-rate environment, which means their net interest margins will remain compressed for some time to come. But the brisk pace of IPOs and M&As fueled investment banking gains while Federal Reserve’s latest stress test results allowed them to boost dividends and buybacks.

Bank earnings

Banks still face an extremely low interest-rate environment, which means their net interest margins will remain compressed for some time to come. A factor that has allowed banks to maintain strong profits despite this has been consistently high trading profits buoyed by the intense market volatility throughout the last year. However, volatility has been trending downward for over a year now, so the opportunities for stock and bond traders to make up for lost interest income is likely to make it harder for bank profits to continue to do as well as they’ve done considering the level of interest rates.

Bank of America (BAC) reported mixed Q2 results, while Citigroup (C) and Wells Fargo (WFC) beat expectations Wednesday. The results come after JPMorgan Chase (JPM) and Goldman Sachs (GS) beat Q2 forecasts but reported sharp slowdowns in their trading revenue.

Bank of America earnings

Bank of America’s earnings came in at $1.03 a share. Provision for credit losses decreased $6.7 billion. Revenue fell 4% to $21.5 billion. Analysts expected Bank of America earnings per share to soar 111% to 78 cents and sales dipping 2.5% to $21.77 billion.

Consumer banking revenue rose 4% to $8.2 billion. Wealth and investment management revenue climbed 14% to $5.1 billion. Global banking revenue was flat at $5.1 billion. Fixed income trading revenue sank 38% to $2 billion, while equity trading jumped 33% to $1.6 billion. Investment banking fees fell 1.7% to $2.1 billion.

Should I buy Bank of America stock?

Shares fell 2.5% to 38.86 on the stock following earnings. The current consensus among 28 polled investment analysts is to buy stock in Bank of America Corp. This rating has held steady since July when it was unchanged from a buy rating. The 24 analysts offering 12-month price forecasts for Bank of America Corp have a median target of 44.00, with a high estimate of 52.00 and a low estimate of 34.00. The median estimate represents a +13.31% increase from the last price of 38.83.

Citigroup Earnings

Citigroup reported EPS of $2.85 on revenue of $17.47 billion. Allowance for credit losses on loans fell 27% to $19.2 billion. Consumer banking revenue fell 7% to $6.8 billion. Investment banking revenue rose 1% to $1.8 billion. Fixed income trading revenue tumbled 43% to $3.2 billion, while equity trading jumped 37% to $1.06 billion.

Analysts estimated Citigroup earnings per share to balloon 298% to $1.99, and revenue to decline 11% to $17.36 billion.

Should I buy Citigroup shares?

Shares dipped 0.3% to 68.17 following earnings. The current consensus among 26 polled investment analysts is to buy stock in Citigroup Inc. This rating has held steady since July when it was unchanged from a buy rating.

The 24 analysts offering 12-month price forecasts for Citigroup Inc have a median target of 84.50, with a high estimate of 116.00 and a low estimate of 66.00. The median estimate represents a +25.43% increase from the last price of 67.37.

Wells Fargo Earnings

Wells Fargo reported EPS of $1.38, helped by a $1.6 billion decrease in the allowance for credit losses vs. a year-ago increase of $8.4 billion, on revenue of $20.27 billion. Analysts were expected earnings to surge 247% to 97 cents a share and sales and sales to slip 0.5% to $17.74 billion.

Consumer banking and lending revenue grew 14% to $8.7 billion. Commercial banking revenue fell 10% to $2.1 billion. Commercial and investment banking revenue dropped 6% to $1.2 billion. Wealth and investment management revenue rose 10% to $3.5 billion.

Should I buy Wells Fargo shares?

Shares rallied 4% to 44.95 following earnings. The current consensus among 27 polled investment analysts is to buy stock in Wells Fargo & Co. This rating has held steady since July when it was unchanged from a buy rating.

The 23 analysts offering 12-month price forecasts for Wells Fargo & Co have a median target of 49.00, with a high estimate of 65.00 and a low estimate of 40.00. The median estimate represents a +8.89% increase from the last price of 45.00.

JPMorgan and Goldman Sachs also beat estimates

JPMorgan’s earnings spiked to $3.78 a share, while revenue came in at $30.5 billion, both beating views. The banking giant released $3 billion from loan loss reserves, boosting the bottom line.

Meanwhile, Goldman Sachs EPS jumped to $15.02 as revenue rose to $15.39 billion, both above estimates. Goldman released $92 million from credit reserves.

Outlook of the banking industry: What happens after rate hikes end?

The brisk pace of IPOs and M&As fueled investment banking gains. The Federal Reserve’s latest stress test results also allowed for banks to boost dividends and buybacks.

As the U.S. Federal Reserve (Fed) increased interest rates, banks’ net interest margins expanded along with bank earnings. But now that the Fed appears to be done raising interest rates, what happens to banks’ profitability? Bank earnings may continue to grow and profitability can remain high due to rising loan volumes.

Banks get the majority of their revenue from the lending business or net interest income. Net interest income is very steady for the banking industry. In fact, it has only declined on an annual basis five times in the last 84 years. Because net interest income is driven by loan volume and rate, a rising volume with flat rates continues to imply rising income.

Loan growth for the industry is almost always positive and should be a reflection of economic growth. Analysts expect 3% to 5% industry loan growth based on about 2% GDP growth plus 2% inflation.

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