Right now the markets are facing down high unemployment and business closures, with a health crisis added to the mix. It’s safe to say that this was not a good year for the American economy — and specifically not for banks. With interest rates close to zero, large bank stocks saw some of their biggest price drops in decades.
There were some macro developments in the economy, such as the fall in unemployment rates each month as businesses begin to open up. However, the banking industry continues to remain one of the more befuddling sectors as corporations face the risk of loans gone bad and low interest rates.
Companies kicked off earnings season this week and bank stocks saw some volatility on Tuesday in anticipation of the results. JP Morgan (NYSE:JPM) shares rose 0.6% while Wells Fargo (NYSE:WFC) stock dropped 4.6%, among others.
However, speculations were soon put to rest when earnings were released. Based on the results, here are three stocks still worth a look:
Bank Stocks: Goldman Sachs (GS)
If we were to crown a winner of the bank earnings season (thus far), it would have to be Goldman Sachs. In the hours prior to market open on July 15, the company released its earnings report and the numbers were a smashing success.
Tensions ran high for many banks into earnings season but the same cannot be said for Goldman Sachs — it saw some of its best revenue in years. According to CNBC, the bank’s revenue for the period was $13.3 billion which beat estimates by over $3.5 billion. Earnings per share (EPS) was not too shabby at $6.26 per share, which eclipsed the estimated $3.78 per share.
There were a lot of shining stars in Goldman’s earnings this year. These include a global markets division that secured $7.2 billion in revenue, asset management division that brought in $2.1 billion and investment banking with a $2.7 billion on the table.
In terms of credit reserves, the company had $1.59 billion in its back pocket, but this wasn’t enough as profits fell by 33%. However, this is hardly a cause for concern for investors, given the stellar revenue numbers across all operations.
Goldman Sachs’ strong performance can be attributed to two main drivers. The first is activities on Wall Street, like trading and banking. Customers’ low-value deposits in retail banking have been a boon for the company’s stock price. This was in tandem with market volatility that led many investors to hedge their losses and place risky bets.
The second comes in the form of a fiscal stimulus from the government. The effect of the pandemic was detrimental to the economy’s performance and the government did everything in its power to keep the credit markets afloat. The aggressive stimulus injected by the central bank enabled Goldman’s currency and commodity market numbers to hit a record high.
Nevertheless, we are only halfway through the year and analysts expect to see a fall in trading revenue in the second half. According to Goldman’s CEO, David Solomon, the earnings are a testament to the company’s diverse business model and although trading revenue has slowed down, it still remains at a “heightened level of activity.”
JP Morgan (JPM)
Although the pandemic weighed heavily on the bank stocks, JP Morgan was able to put up some surprising results in this period. The company shattered analyst expectations with a high trading revenue that was aided by strong market volatility.
According to a report by CNBC, JP Morgan posted earnings for this period at $1.38 per share, which was higher than the estimated $1.04 as per analyst estimates. As for revenue, the company earned an adjusted revenue of $33 billion in comparison to the expected $30.3 billion. The numbers provide a healthy cushion for the bank to sustain its dividends.
JP Morgan’s strong bottom line comes from its high trading revenue, which was up 79% in a year-over-year comparison. The bank also boasts a strong loss-absorbing capability thanks to a large credit reserve. According to its CEO, Jamie Dimon, JP Morgan has a liquidity of $1.5 trillion and $34 billion in credit reserves.
However, the earnings call did have its low points. JP Morgan reported a loss of $176 million in its retail banking division which was significantly lower than the $4.6 billion profit last quarter. However, the bank’s $8.9 billion set aside for its corona-induced troubles helped offset some of these losses.
But despite the better-than-expected numbers, Dimon urged caution about the bank’s future. He stated that the myriad of uncertainties that exist in the second half of the year could set back optimistic returns this period. This skepticism comes after governments have reversed the course of reopening in many states.
Nevertheless, Dimon is optimistic that JP Morgan’s “fortress balance sheet” is prepared to overcome what may come its way. In the coming months, investors can expect to see greater swings in this stock as the future of the banking sector is driven by the progression of the pandemic — for better or for worse.
Another bank stocks earnings call that came as a pleasant surprise and beat estimates is Citigroup. Like JP Morgan, the bank’s earnings were also aided by its fixed-income trading revenue. However, it did sustain losses in some divisions.
According to Business Insider, the company reported a net income of $1.3 billion for the earnings period which was 73% lower in a year over year comparison. However, the EPS was 50 cents, which was higher than the expected 38 cents per share. Revenue was also higher, at $19.8 billion, which beat the forecasted $19.2 billion.
Citigroup’s revenue surge comes after the sharp volatility in the markets as a result of the pandemic. The bank also received a fiscal stimulus from the government that helped soften the blow of its losses. The revenue from fixed income markets was 68% higher while investment banking revenue saw a spike of 37%.
However, the company’s earnings weren’t entirely rosy. Citigroup suffered a credit crisis that hurt its numbers. One of the biggest divisions that was hurt as a result of the pandemic was consumer banking as customers defaulted on loans and credit card payments. This problem was reflected in Citigroup’s numbers.
The bank’s total allowance for credit losses (ACL) for the period was a whopping $26.4 billion, well more than just $12.5 billion in the year-ago quarter. The ACL is the amount of money the bank puts aside for debts that it is unlikely to recover. The increased allowance rate comes as a result of customers’ inability to repay loans. Total net credit losses were 12% higher compared to the previous year.
Despite the high credit costs, the company’s CEO, Michael Corbat, is confident of Citigroup’s strength to weather the Covid-19 storm. Moving forward, the company will focus its efforts on risk management in order to prepare for the future. The pandemic has created an onslaught of uncertainty for most major banks but Citigroup has emerged relatively unscathed.
While the future of the company is still up in the air, Citigroup’s current earnings has restored a sliver of confidence in investors. This bank stock is definitely worth a second look.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for Investor Place since 2020. As of this writing, Divya Premkumar did not own any of the aforementioned stocks.