US bank results are in...but can you bank on their share prices rising again?

#002

Oct 16, 2020

New York City's Evolving Skyline - The New York Times

If you want an overview of the US bank results from this week - then read on…

Most of the results beat analysts expectations - mainly because the expectations were set pretty low. News that a federal stimulus in the US won’t be forthcoming until after the election, if at all, combined with Covid spikes around the world, has seen the share prices of the US banks almost unanimously fall this week (step forward $MS)...

Stock prices % change over earnings week (12th October to 15th October):

If you haven’t read the earrings reports, in the highest of high level, here’s a summary:

Consumer banking performance

In general, the consumer banking divisions have been hit. This is due to a mixture of a low interest rate environment perpetuated at federal level and a reduction in consumer spending. NIM (Net Interest Margin) across the board was lower. BAML saw NIM reduce by 17%, Wells by 19% and both banks have faired the worse in post earnings trading. JPM’s consumer business revenue fell by 9% for the same reasons.

Bad loan provisions have not been as terrible this quarter as might have been expected - Citi’s loan provision was down by $5bn on last quarter, JPM’s actually reduced their provision by $569m, showing that in the results at least, the banks are puffing out their chest and claiming that they have enough provisions should the seemingly inevitable happen. Two counters to that. One is that the full effect of defaults might not be felt in the US until next year, after the last of the stimulus and job support initiatives are removed, meaning that there is still time for all banks to add to their provisions before the proverbial hits the fan. Also secondly how confident are they themselves? Jaimie Dimon, the CEO of JPM came out and claimed that he wouldn’t be supervised if JPM’s $10bn provision doubled by the end of the pandemic. Not out of the woods by a long shot.

The strong silos…

One major contributor to revenue numbers has been the Investment Banking divisions, who have generally thrived on the market volatility of the last few months. JPMs revenue in Corporate and IB rose 21% to $11.5bn (half its total revenue) and profit went up 52% to $4.3bn - booking almost half of the bank's profits in the quarter ($9.44bn total profit for JPM across the board). Trading revenue in particular was up 30%. MS’s equities trading revenues was up 14% to $2.3bn and investment banking revenues were up 11% to $1.7bn. Fixed income revenues were also up 35% year on year for MS, whilst Goldmans saw their fixed income trading grow by 49% - beating all others on Wall Street.

Wealth and asset management revenues have also improved according to the results. At JPM ‘WAM’ profitability was up 31% - and to reinforce the opportunity JPM are publicly in the market for a new asset manager. The reasons; great hoarding of wealth, less spending, underserved segment, increased assets = increased fees. MS have invested heavily in their wealth offering over the past few years and their quarterly performance was up 6% - an obvious and easy adjacent to generate revenues.

Where banks have strengthen is the balance sheet, with deposits up to record levels. This is both good and bad for banks. In the US there are monthly ‘maintenance’ fees attributed to savings accounts and on the majority the interest rates payable on these deposits are at significant lows. However holding these deposits have made the banks ‘too capitalized’ and it’s expensive stuff. As lending has become more restrictive (pre Covid…) so banks have taken more deposits - which Covid has catalyzed. Deposit insurance premiums increase as banks hold onto more cash - and savings accounts become less and less profitable as there are cheaper, government backed loans for businesses to take out. Therefore, hoarding cash becomes an expensive game for the banks.

Whats the affect on the share price been?

The only bank to see stability in their share price this year is Morgan Stanley, attributed to their lack of significant exposure to consumer banking versus their rivals (down -1.38% this year). Share price trends of the banks in the US are generally as fruitful as a dessert drought and it’s hardly a sector that is generating significant interest with investors money. This is a time remember when investors can just follow the herd into big tech, known entities by just following the news - the price multiples that Banks trade off (traditionally around 10 - 15x) just aren’t attractive for short term or longer term growth at the moment (vs 25x. upwards for tech).

So what needs to change? Well in a heavily regulated and capitalized world it is hard to imagine that operational / procedural reform in the way banks are set up internally will contribute significantly. Striving for a fully digital experiences will go someway to reducing core costs, but ultimately none of the largest banks can go fully digital for regulatory purposes amongst other things and even if they did, you would tend to think that the subsequent cost savings and operational efficiencies wouldn’t be enough to drive the multiples that will make the shares an attractive long term investment.

Whats the knock on effect on the platform players and the UK banks

The core banking players who feed off the FS industry generally announce the week after next, with the UK banks entering the fray at the end of the month. The US platform players might be hit by a reduction in spend generally and less issuing / interchange revenue (if that is there bag) but conversely will benefit from a movement to online spending (if they have online acquiring gateways and processing capabilities)

As for the British banks - well it was all doom and gloom in Q2 and on the face of it, the macro economic conditions have only got worse as here in the UK we enter into a second wave of lockdowns and social curbs. With little trading operations vs their US cousins (and if they have, only a fraction based in the UK), the banks Q3 earnings could be seriously depressing - but we will get into the nitty gritty in subsequent posts.

If you want to leave a comment pls do in the link below. If you want to follow me on social I am on @adamd8 on Twitter or on Linkedin, generally talking about the banks, the markets and occasionally the football….

Thanks for reading!

Core banking, Core markets 🏦 📈

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