BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Earnings Update On Four Financial Stocks

Following
This article is more than 6 years old.

Although investors showed varying levels of enthusiasm for the beginning of Q3 earnings season in the financial space, we saw the overall results from JPMorgan Chase, Bank of America and PNC Financial Services Group as positive, while Wells Fargo continued to suffer from increased legal costs and reputational damages due to the cross-selling scandals, despite posting slightly better-than-expected adjusted profits.

JPM said it had adjusted Q3 EPS of $1.75, versus consensus analyst estimates of $1.65. Despite weakness in Fixed Income, Commodity and Currency trading, JPM realized broad based revenue growth. Core loans were up 7% year over year and 2% quarter over quarter. The banking behemoth saw solid growth in its credit card business and maintained a market leading share of Global Investment Banking fees. Additionally, the firm enjoyed record net income in Asset and Wealth Management as well as record assets under management of $1.9 trillion.

Chairman and CEO Jamie Dimon commented, “JPMorgan Chase delivered solid results in a competitive environment this quarter with steady core growth across the platform. And for the first time, the Firm led the nation in total U.S. deposits, as consumers and businesses continue to view us as their partner of choice…In Consumer & Community Banking, card sales and merchant processing volumes were once again up double digits, while loans and deposits continued to grow strongly. In the Corporate & Investment Bank, we continued to lead our peers in Investment Banking fees, and Treasury Services and Securities Services each generated over $1 billion in revenue. Commercial Banking again delivered outstanding performance with record revenue as our long-term investments in the business are paying off. Our Asset & Wealth Management business delivered strong results with record net income and AUM this quarter.”

JP Morgan Chase & Co.

Mr. Dimon concluded, “The global economy continues to do well and the U.S. consumer remains healthy with solid wage growth. Unfortunately, natural disasters in the U.S. and abroad have impacted many of our customers and we have responded with enormous financial support as well as the expertise and generosity of our employees to help these customers, clients and communities. Building on our success to-date in Detroit, we have announced new initiatives in Chicago and Washington, D.C. to drive inclusive economic growth in those communities. We will be there to do our part. And this is in addition to the $1.7 trillion of credit and capital supplied this year to consumers and small and mid-sized businesses and corporate clients.”

We continue to be big fans of JPM and its growth prospects, along with its reasonable valuation and 2.3% dividend yield.

JPM’s largest U.S. competitor also had a strong Q3, with Bank of America beating consensus analyst estimates by 5% when it turned in adjusted EPS of $0.48. Profits were up 17% year over year, with the improvement driven by strong operating leverage and solid asset quality. BAC also endured a challenging environment in trading, but saw consumer loans jump 8%, deposit growth rise 9% and Merrill Lynch client assets increase to $2.7 trillion. Merrill also reported the best quarter of investment banking fees since becoming part of Bank of America, while BAC continued to reduce non-interest expenses.

CEO Brian Moynihan commented, “Our focus on responsible growth and improving the way we serve customers and clients produced another quarter of strong results. Revenue across our four lines of business grew 4% (quarter over quarter), even with a challenging comparable quarter for trading. We delivered positive operating leverage year over year for the 11th consecutive quarter while continuing to invest in improved capabilities. Digital activity with customers continues to shape the way we provide products and services to customers, with the most recent example being Zelle, our new person-to-person payment capability.”

CFO Paul Donofrio added, “Client activity remained strong across the franchise. Year over year, we grew average deposits by $45 billion, or 4%, and increased average loan balances in our business segments by $46 billion, or 6%. It's worth noting that we grew loans while remaining within our customer and risk frameworks, as evidenced by our low loss rates. Our balance sheet remained strong, which enabled us to repurchase nearly $3 billion in common stock and pay $1.3 billion in common stock dividends in the quarter.”

We continue to like BAC shares and the company’s focus on not only cost containment but growth. While the dividend yield is below 2% (though we expect it to grow going forward), we like that the stock trades at less than 13 times NTM earnings expectations.

Regional banking and financial services firm PNC also reported Q3 adjusted EPS that beat investor expectations, earning $2.16 on better revenue than projected. Despite the handsome numbers, investors seemingly were looking for more. While PNC did realize overall loan growth it was not as strong as some were expecting, but we had no issues with the quarter. PNC generated positive operating leverage and benefited from continued cost cuts and a slight expansion of its net interest margin, in addition to its strong capital and liquidity positions.

PNC

“PNC continued to win new clients and grow both loans and deposits in the third quarter on the strength of our relationship-based business model and the quality of our product offering,” said CEO William S. Demchak. “Net interest income increased and our margin expanded as we benefited from higher short-term rates and our well-positioned balance sheet. We continue to focus on disciplined expense management even as we invest in our businesses, and we believe we have additional opportunities to drive further growth and efficiency over the long term.”

We still think that PNC shares have room to run as we are constructive on the firm's operating momentum, continued cost containment and refocus on its consumer business. We also see PNC benefitting from higher interest rates.

Wells Fargo shares dropped a bit last week, even as the banking giant managed to report adjusted EPS of $1.04, slightly better than consensus estimates, as investors are still struggling to move the company out of the penalty box. Additionally, Q3 was a bit of a setback relative to peers as WFC saw a drop in overall loan balances, with only modest leverage to rising interest rates. All that said, the company continued to add deposits and benefitted from those deposits. With all of the negative press, not to mention the grandstanding of Senator Elizabeth Warren and a number of her Capitol Hill counterparts, we see the continued growth of the bank’s low-cost funding base as encouraging and think efforts to overhaul its sales practices and image will prove capable of reviving revenue growth as we move farther away from the unfortunate scandal. Expenses during this period of righting the wrongs will remain elevated, but we believe that long-term we will see WFC return to a relatively lean and efficiently run large financial institution.

CEO Tim Sloan commented on the quarter, “Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank. While our financial performance in the third quarter included the impact of a litigation accrual for previously disclosed, pre-crisis mortgage-related regulatory investigations, I am proud of the commitment of our 268,000 team members who put our customers first. We saw total average deposit growth; loan growth in our residential mortgage, credit card and subscription finance portfolios; as well as higher assets under management in Wealth and Investment Management. We also continued to invest in customer-focused innovation and have begun the rollout of our online mortgage application and “Intuitive Investor,” our online platform for digital investing and professional advice. We’re also committed to helping our communities recover from the devastation of the recent hurricanes by providing payment relief and proactively waiving fees for impacted customers, and our foundation donated $2.6 million for hurricane relief efforts.”

CFO John Shrewsberry added, “Wells Fargo reported $4.6 billion of net income in the third quarter, which included the impact of the $1 billion, or $(0.20) per share, discrete litigation accrual. We continued to see good credit performance and our liquidity and capital remained exceptionally strong. During the quarter, our first under our 2017 Capital Plan, we returned $4.0 billion to shareholders through common stock dividends and net share repurchases, up from $3.4 billion in the second quarter. We remain committed to our target of $2 billion of expense reductions by the end of 2018 which will be reinvested in the business and an additional $2 billion by the end of 2019 intended to go to the bottom line.”

With near-term reputational and legal cost challenges offsetting the potential benefits from rising rates, we have adjusted our long-term Target Price lower for WFC.

-----View a complete list of all previously recommended stocks here.

Follow me on TwitterCheck out my website