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Peter Foley / Bloomberg
Bigger banks have reported profits, and investors can be forgiven if they are unsure where the opportunities are now. The answer may lie in how much uncertainty they are willing to accept.
Analysts warned that the quarter would be “sloppy” and “confusing,” and banks were not disappointing. There were things we expected to see, an increase in business activity and higher provisions for credit losses, but there was also a wide dispersion in performance, between commercial banks and investment banks, to be sure, but also between individual banks.
JPMorgan Chase (ticker: JPM) was the first to come out, and while it surprised Wall Street with its trading gains, the bank had to set aside $ 10.5 billion to cover potentially bad loans. CEO Jamie Dimon gave a cautious tone about the economic recovery during an analyst call, telling investors that the bank is “prepared for the worst case scenario.” Still, JPMorgan’s shares managed to end the week by 2%.
The rest of the big banks were not so lucky. The trade also helped Citigroup (C), but still profits fell 73%. Bank of America (BAC) had provisions for credit losses below expectations, but operators were concerned about the drop in the bank’s net interest income, which could be a problem for a while due to perpetually low interest rates . Citigroup shares fell 4.6% during the week, while Bank of America fell 3.3%.
Pure game investment banks, with their smaller loan books, were expected to outperform the most rate-sensitive money center banks, and they did. But few likely expected the gulf between Morgan Stanley (MS) and Goldman Sachs Group (GS) to be as wide as it was. While Goldman Sachs’ earnings were flat compared to the prior year quarter, with a $ 945 million burden in litigation and regulatory expenses, Morgan Stanley saw record-breaking quarterly earnings and profits. Its performance was so good that CEO James Gorman bragged about the health of his dividends at a time when other banks are struggling to cover theirs. Goldman’s shares rose 2.9% last week, while Morgan Stanley gained 5.2%.
Given that configuration, running to Morgan Stanley and Goldman may seem attractive, but even they are fraught with uncertainty as management noted that business activity, while solid, has begun to decline. Pipelines for the deal’s activity are also low and are expected to remain low, while economic conditions remain uncertain.
Could it be time to embrace uncertainty and consider Wells Fargo (WFC) the most uncertain of the uncertain and the worst performance of the big banks this year? Shares fell 53% in 2020, while SPDR S&P Bank’s exchange-traded fund (KBE) fell 34%. It would be easy to call Wells Fargo’s profits a disaster, even knowing in advance that they would be bad. The reason: Wells Fargo, after stumbling on the Federal Reserve’s annual stress test, had told investors that it would have to cut its dividend. And what a cut it was: to 10 cents from 51 cents, a drop of 80% and below the 25 cents that analysts expected. Wells also posted its first quarterly loss since the last financial crisis, as it accumulated reserves at $ 9.6 billion.
The problems were compounded by the fact that the bank is still at the checkpoint after its fake account scandal and is operating under a $ 2 trillion asset limit, which was only temporarily lifted by the Federal Reserve to who could participate in the Paycheck Protection Program. All banks must contend with low interest rates and the potential for increasing credit losses; Wells has fewer levers for growth.
But Wells has something the other banks don’t have: trouble solving. Wells Fargo recognized the poor performance due to his past misdeeds. “We are responsible for the position we are in,” designated CEO Charlie Scharf recently said in a call with analysts. “We also recognize that we have been extremely inefficient for far too long, and we will begin to take decisive action, none of which will affect our risk and regulatory work, to increase our margins.”
Scharf said the bank is seeking to cut some $ 10 billion in spending, noting that it is less efficient than its peers, adding that “third-party spending here is extraordinary.” The things we trust outsiders to do are beyond anything I’ve ever seen. ”
Some analysts begin to see signs of progress. Evercore ISI analyst John Pancari says Wells is taking decisive steps to conserve capital and cut expenses. “The battle is likely to be a long one and the winds against earnings will continue to be a persistent factor, but we believe the tide is turning Wells’ fundamentals,” writes Pancari.
Wells Fargo’s shares are also cheap compared to its peers. It is trading at 0.8 times the tangible book value, compared to 1.6 times for JPMorgan Chase and 1.2 times for Bank of America. For that to change, the bank needs to move forward to break below the asset limit and cut its spending, writes Edward Jones analyst Kyle Sanders. “Solving these problems requires a talented management team (which we believe they now have) and time,” he writes.
Sure, there is no guarantee that Wells can design a quick change. But if you’re looking for a comeback story, Wells Fargo is.
Write to Carleton English at [email protected]
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