The financial sector was sluggish last year thanks to the coronavirus pandemic and the Federal Reserve’s dovish monetary policy, which promises to keep interest rates low for the foreseeable future. While the banking space is not yet out of the woods, there has been rising optimism among investors about the industry’s potential steady recovery this year. Banking stocks are expected to be back in favor concomitant with the effectiveness of a second federal fiscal stimulus package and a higher long-term interest rate outlook.
The sector lagged the broader market in 2020. This is evident from the SPDR S&P Bank ETF’s (KBE) 10.9% loss versus the S&P 500’s 15.4% returns. However, KBE’s 38% return over the past three months reflects solid short-term bullishness as bank stocks have already rallied higher on positive vaccine news. Additionally, the Federal Reserve’s recent round of stress testing found U.S. banks to be sufficiently healthy to withstand the adverse financial conditions caused by the pandemic.
Analysts believe normal business activities have been restored and demand for loans might have improved in the fourth quarter. However, major banking companies have not yet provided their earnings outlook for 2020.
JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), Citigroup, Inc. (C) and PNC Financial Services Group, Inc. (PNC) are scheduled to report their earnings this week. So, we think it is worth keeping a close eye on these stocks.
JP Morgan Chase & Co. (JPM)
JPM is a leading global financial services firm with assets of $3.2 trillion and operations in more than 60 countries. The firm is a leader in investment banking, commercial banking, and asset management. It operates under four segments – Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).
JPM will host its conference call on January 15th to discuss its results for the fourth quarter and full-year 2020 ended December 31, 2020. The company is benefiting immensely from its strong capital, massive reserves, and solid liquidity position. Its client-driven business model and footprint expansion have allowed it to capture significant market share in several operations. Analysts expect JPM’s full-year revenue to grow 1.3% year-over-year.
In the third quarter ended September 30, 2020, JPM posted revenue of $29.9 billion, which was relatively stable compared to the year-ago quarter. This was driven primarily by a 21% year-over-year rise in the CIB sector. The company set aside $611 million as provision for credit losses to maintain its credit reserves at $34 billion. Its EPS for the quarter came in $2.92, rising 112% sequentially.
JPM excelled in the CCAR Round 2 stress test conducted last month. The firm’s Basel III Standardized approach minimum Common Equity Tier 1 (CET1) capital ratio remained at 11.3%, inclusive of the Stress Capital Buffer (SCB) requirement of 3.3%. Consequently, the company’s board has approved a new common equity share repurchase program of $30 billion.
How does JPM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
B for Industry Rank
A for Overall POWR Rating.
It is ranked #1 in the 11-stock Money Center Banks industry.
Wells Fargo & Company (WFC)
WFC is a diversified, community-based financial services company with $1.92 trillion in assets. It operates in 7,200 locations in 31 countries worldwide. The firm provides banking, investment, mortgage, and consumer and commercial finance products and services to individuals, businesses, and institutions. WFC functions through three segments – Community Banking, Wholesale Banking, and Wealth and Investment Management.
WFC will hold its earnings webcast on January 15 to discuss the financial results of its fourth quarter ended December 31, 2020. The company is prioritizing the implementation of its risk, control, and regulatory work to improve operational and financial performance. Moreover, the firm remains strong with its capital and liquidity levels well above regulatory minimums.
However, analysts expect WFS’s full-year 2020 revenue and EPS to decline 14.8% and 91.9%, respectively.
WFC reported impressive third-quarter results, with $18.9 billion as revenues, rising 6% sequentially as the firm witnessed strong mortgage banking fees, higher equity markets, and declining sequential charge-offs. Provisions for credit losses remained relatively flat compared to the prior quarter, cumulating at $20.5 billion for the year. Its EPS for the quarter came in at $0.42, compared to the quarter-ago loss of $0.66 per share.
The company recently announced that the Office of the Comptroller of the Currency (OCC) has terminated a 2015 consent order related to the company’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. In December, WFC announced that it will resume its share buybacks and will continue dividend payments in the first quarter of fiscal 2021. As part of the response to the Fed’s test, WFC said, “While we expect to have modest capital distribution capacity in the first quarter, we continue to have significant excess capital above regulatory requirements.”
Under POWR Ratings, WFC has been accorded a “B” rating for Industry Rank. Of 11 stocks in the Money Center Banks industry, the company is ranked #10.
Citigroup, Inc. (C)
C is a diversified financial service holding company that provides various financial products and services, banking, credit card lending, and investment services, in North America and internationally. The firm operates primarily through three segments – Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other.
C is scheduled to report its results for the fourth quarter ended December 31, 2020 on January 15. The bank managed to stabilize its credit costs last year and its management believes stated that “the backbone of our global network, Treasury and Trade Solutions experienced strong client engagement in the face of low interest rates.” The firm has witnessed significant growth in Fixed Income Markets, Investment Banking, Equity Markets and the Private Bank as part of its ICG group last year. Analysts expect C’s full-year 2020 revenue to grow 0.1% year-over-year.
C reported total revenue of $17.3 billion in the third quarter, declining 7% year-over-year, reflecting primarily lower revenues in GCB and Corporate segments. Provision for credit losses was $26.4 billion, representing 4% of total loans. Its EPS for the quarter came in $1.40, rising 180% sequentially.
C issued a statement last month highlighting its intention to resume its share buyback plan and begin paying a $0.51 dividend per share Q through 3Q of its fiscal 2021. The regulatory stress test report enabled the bank to take certain capital actions during the first quarter of fiscal 2021, subject to certain restrictions, while extending the period for notification regarding the recalculation of its stress capital buffer requirement through March 31st, 2021.
C’s strong momentum is reflected in its POWR Ratings. It has a “Buy” rating with a “B” in Trade Grade and Industry Rank. Within the Money Center Banks industry, it is ranked #7 of 11 stocks.
PNC Financial Services Group, Inc. (PNC)
PNC is one of the largest diversified financial services institutions in the United States. It operates through six segments: Retail Banking, Corporate & Institutional Banking, Asset Management Group, Residential Mortgage Banking, BlackRock, and Non-Strategic Assets Portfolio.
PNC is scheduled to report the results for the fourth quarter ended December 31, 2020 on January 15. The company has executed its strategic priorities well including ongoing investments in its national expansion and digital offerings. PNC’s deposit franchise also acted as a huge growth catalyst last year. While analysts expect PNC’s full-year revenue to decline 5.9%, its EPS is estimated to grow 42.7% year-over-year.
PNC reported total revenue of $4.3 billion in the third quarter, increasing $205 million, or 5% year-over-year. Its provision for credit losses was $52 million, rising to $3.43 billion so far this year. Its EPS for the quarter came in $2.92, rising 9% compared to the year-ago quarter.
In November, PNC signed a definitive agreement to acquire BBVA USA Bancshares, Inc., the U.S. banking subsidiary of Spanish financial group, Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), for a purchase price of $11.6 billion. Moreover, the firm s recently announced the redemption of $900 million of 2.5% senior bank notes, which are due later this month.
It is no surprise that PNC is rated a “Strong Buy” in our POWR Ratings. It is also rated an “A” in Trade Grade and Buy & Hold Grade, and a “B” in Peer Grade and Industry Rank. Within the Money Center Banks industry, it is ranked #3 of 11 stocks.
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JPM shares were trading at $136.23 per share on Monday morning, up $0.21 (+0.15%). Year-to-date, JPM has gained 7.98%, versus a 1.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…
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