JPMorgan (JPM) - Get JPMorgan Chase & Co. (JPM) Report and Citigroup (C) - Get Citigroup Inc. Report, the two more diversified banks to report earnings Tuesday, beat top and bottom line estimates. Wells Fargo (WFC) - Get Wells Fargo & Company Report, less diversified, posted a dismal quarter, demonstrating how shorter-term investors may want to manage bank stock picks.
JPMorgan and Citigroup beat revenue and earnings estimates on the strength of their businesses outside of lending, while Wells Fargo got caught in the economic storm of the second quarter. And the market response was way more negative for Wells Fargo.
Here were the results of these three banks versus expectations:
- Revenue: $33B v. $30.3B (actual result: +3% year-over-year)
- Net interest income: $14B v. $13.958B (-4% YoY)
- Equity Trading: $2.4B v. $2.067B (+38% YoY)
- Markets Revenue: $9.7B (+79% YoY)
- Loan Loss Provisions: $8.9B v. $7.561B
- Return on equity 7% v. 10.4% (down from 13.1% last year)
- Adjusted EPS: $1.38 v. $1.10 (-52% YoY)
In a volatile market, JPMorgan’s trading operations flourished. The heavy loan loss provisions, cash set aside as an expense to absorb potential credit losses, was a soar spot and a negative signal for the economy. While consumer banking suffered, JPMorgan is showing that its other segments, combined with its strong balance sheet and relatively safe dividend is enough to satisfy equity investors. CEO Jamie Dimon said the dividend is currently safe.
The stock, after having entered earnings in correction territory since June 8, rose as much as 1.67% to $98 a share. JPM is one of the only banks trading at above its book value per share currently. The stock gain moderated to just 0.02% in the late morning.
- Revenue: $19.8B v. $19.1B (+5% YoY)
- Markets revenue: $6.9B (+48%)
- Fixed-income, currency, commodity trading: $5.6B v. $4.985B (+68%)
- Total Cost of Credit: $7.9B
- Return on equity: 2.4% v. 6.6% (9.1% last year)
- Adjusted EPS: $0.50 v. $0.40 (-74%)
Citi said it also saw notable weakness in consumer banking, but its trading operations saw the company through.
It’s possible, though not entirely clear, that better-than-expected operating leverage was a part of the better-than-expected earnings result. Citi is also showing the benefit of being a diversified business. The stock only fell 2.7% to $50 a share, which may be somewhat surprising given its recent woes.
But the heavy credit losses and poor lending revenues are a concern. Trading revenues can be extremely volatile and given to market conditions. Management made no mention of the outlook, whereas JPM’s Dimon said consumer lending improvements were found in April. Citi management also made limited mention of the safety of dividends.
- Revenue: $17.8 B v. $18.61B (-17.5%)
- Net interest margin: 2.25% v. 2.33 (2.82% last year)
- Net interest income: $9.9B v. $10.31B (-18%)
- Credit Loss Provision: $8.4B
- Return on equity: 6.6% v. 6.1% (13% last year)
- Net Loss: $2.4B
- 2020 Dividend: Cut to 10 cents from 51 cents
Wells does not have strong secondary businesses comprising a decent chunk of revenue to see it through. The economic turbulence ahead is now threatening the company’s ability to return cash to shareholders.
Here’s what management said on the earnings print:
"We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter. It is critical in these uncertain times that our common stock dividend reflects current earnings capacity assuming a continued difficult operating environment, evolving regulatory guidance, and protects our capital position if economic conditions were to further deteriorate. Given this, we believe it is prudent to be extremely cautious until we see a clear path to broad economic.”
The stock, even after entering earnings trading at just over half of its book value per share, an incredibly low valuation, fell almost 6% to $23.90 a share. That leaves a dividend yield of 4% and indicates investors possibly see earnings estimates worsening. It also presents a buying opportunity for medium to long-term investors.