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Plenty of Positives in Big Bank Earnings: What's Next?
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The market liked what it saw in the fourth quarter releases from JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and even Wells Fargo (WFC - Free Report) . There was, in fact, plenty to like in these results, with higher interest rates helping these financial giants expand their margins, while demand for loans remained on the strong side to help loan portfolios grow.
The issue with the bank stocks isn’t so much their current earnings power, but rather how their profitability will shape up in the coming economic slowdown.
Bank investors are wary of the group’s track record of making a lot of money during the good times, which the group then ends up giving back during the bad times. The question is how ‘bad’ will the coming ‘bad times’ be for the economy and what will that do to bank earnings.
Getting back to the group’s Q4 results, the fact that the investment banking business was weak in the period was no surprise for the market. We knew that advisory fees would likely be about half of what they were in the year-earlier period, as persistent macroeconomic headwinds had been weighing on deal making.
For JPMorgan ((JPM - Free Report) ), investment banking fees were down -58%, causing revenues in the corporate and investment banking unit to be down -9%. Partly offsetting the investment banking weakness was a +7% revenue gain on the trading side, primarily reflecting continued momentum on the fixed income, currencies and commodities side (FICC), with equities essentially flat from the year-earlier level.
Trading revenues were up +27% at Bank of America ((BAC - Free Report) ), with FICC revenues up an impressive +49% and equities up +1%, likely indicating that it gained market share. It will be interesting to see trading revenue trends at Goldman Sachs ((GS - Free Report) ), which reports on Monday, as it has a dominant FICC trading franchise. Investment banking fees were down -54% at Bank of America, while the same at Citigroup ((C - Free Report) ) were down -58% from the year-earlier level when record deal-making activities had juiced results at all Wall Street firms.
The strength for these banking giants lay in traditional commercial banking, with expanded net interest margins and bigger loan portfolios resulting in very strong net interest earnings.
JPMorgan’s loan portfolio was up +5% from the same period last year, even though demand for rate-sensitive auto and mortgage loans was significantly down. The same for Bank of America was an impressive +11% increase over the year-earlier period. JPMorgan’s net interest income reached a new quarterly record of $20.2 billion, up +48% from the year-earlier level. The same at Bank of America increased +29% to $14.7 billion and Wells Fargo’s ((WFC - Free Report) ) jumped by more than +45%.
The unflattering year-over-year profitability comparisons for each of these companies – JPMorgan’s earnings increased +5.9%, Bank of America’s increased by +1.7% while Citigroup and Wells Fargo suffered declines of -43.3% and -50.2%, respectively - are primarily a function of differences in how reserves or provision for loan losses behaved in the two periods. All of these banks booked reserves for loan losses given the coming economic weakness while they were releasing previously booked reserves in the year-earlier period.
In terms of the Finance sector scorecard, we now have results from 22.1% of the sector’s market capitalization in the S&P 500 index. Total earnings for these companies are down -13.4% from the same period last year on +6.8% higher revenues, with 85.7% beating EPS estimates and 57.1% beating revenue estimates.
Looking at the Finance sector as a whole, total Q4 earnings for the sector are expected to be down -8.3% on +2.5% higher revenues.
For the Zacks Major Banks industry, which includes all of the aforementioned banks and accounts for roughly 40% of total Finance sector earnings, total Q4 earnings are on track to be down -10.3% from the same period last year on +8.8% higher revenues.
The table below shows the sector’s Q4 earnings and revenue expectations at the ‘medium’ industry level in the context of what the space reported in the preceding period and what is expected in the following quarter.
Image Source: Zacks Investment Research
As noted earlier, skeptics of the banking industry argue that the group ends up giving away all the profits that it had accumulated during the good times when the macro environment turns south. The Covid downturn was an anomaly in that respect, but there is some truth to the allegation.
We will see how the economic picture unfolds in the coming quarters, but the credit quality metrics in the reported Q4 results do not point towards any imminent deterioration.
The earnings growth picture for the Finance sector is expected to improve in 2023, as we turn the page on tough comparisons even though the economic growth pace is expected to moderate under the cumulative weight of the Fed’s tightening. Finance sector earnings are expected to be up +11.2% in 2023 on +4.4% higher revenues, which would follow the -13.6% earnings decline on +1.1% higher revenues in 2022.
2022 Q4 Earnings Season Scorecard
Including results from all the banks, we now have Q4 results from 29 S&P 500 members or 5.8% of the index’s total membership. Total earnings for these 29 index members are down -10.5% from the same period last year on +7.5% higher revenues, with 75.9% beating EPS estimates and 65.5% beating revenue estimates.
The Q4 reporting cycle accelerates this week, with more than 65 companies coming out with quarterly results, including 25 S&P 500 members. Most of the companies reporting this week are from the Finance sector, but we have few bellwether operators from other sectors on the docket as well. The notable companies outside of the Finance sector reporting this week include United Airlines (UAL) on Tuesday (1/17), Proctor & Gamble (PG) and Netflix (NFLX) on Thursday (1/19) and Schlumberger (SLB) on Friday (1/20).
The comparison charts below put the EPS and revenue beats percentages in Q4 in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the earnings and revenue growth rates in Q4 in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows the expected 2022 Q4 earnings and revenue growth expectation in the context of where growth has been in recent quarters and what is expected in the next few quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
Estimates for 2023 have been steadily coming down, as we have been flagging for some time now. You can see this in the chart below that shows how the aggregate earnings total for the index has evolved since the start of 2022.
Image Source: Zacks Investment Research
Please note that the $1.961 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $220.65, which compares to $216.89 in 2022.
The chart below shows this index ‘EPS’ has evolved since the start of 2022.
Image Source: Zacks Investment Research
From their peak in mid-April 2022, S&P 500 earnings estimates have been revised down by -9.9% for the index as a whole and by -12.1% on an ex-Energy basis, with much bigger cuts to estimates for the Construction, Consumer Discretionary, Retail, Tech and Aerospace sectors.
Image: Bigstock
Plenty of Positives in Big Bank Earnings: What's Next?
The market liked what it saw in the fourth quarter releases from JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and even Wells Fargo (WFC - Free Report) . There was, in fact, plenty to like in these results, with higher interest rates helping these financial giants expand their margins, while demand for loans remained on the strong side to help loan portfolios grow.
The issue with the bank stocks isn’t so much their current earnings power, but rather how their profitability will shape up in the coming economic slowdown.
Bank investors are wary of the group’s track record of making a lot of money during the good times, which the group then ends up giving back during the bad times. The question is how ‘bad’ will the coming ‘bad times’ be for the economy and what will that do to bank earnings.
Getting back to the group’s Q4 results, the fact that the investment banking business was weak in the period was no surprise for the market. We knew that advisory fees would likely be about half of what they were in the year-earlier period, as persistent macroeconomic headwinds had been weighing on deal making.
For JPMorgan ((JPM - Free Report) ), investment banking fees were down -58%, causing revenues in the corporate and investment banking unit to be down -9%. Partly offsetting the investment banking weakness was a +7% revenue gain on the trading side, primarily reflecting continued momentum on the fixed income, currencies and commodities side (FICC), with equities essentially flat from the year-earlier level.
Trading revenues were up +27% at Bank of America ((BAC - Free Report) ), with FICC revenues up an impressive +49% and equities up +1%, likely indicating that it gained market share. It will be interesting to see trading revenue trends at Goldman Sachs ((GS - Free Report) ), which reports on Monday, as it has a dominant FICC trading franchise. Investment banking fees were down -54% at Bank of America, while the same at Citigroup ((C - Free Report) ) were down -58% from the year-earlier level when record deal-making activities had juiced results at all Wall Street firms.
The strength for these banking giants lay in traditional commercial banking, with expanded net interest margins and bigger loan portfolios resulting in very strong net interest earnings.
JPMorgan’s loan portfolio was up +5% from the same period last year, even though demand for rate-sensitive auto and mortgage loans was significantly down. The same for Bank of America was an impressive +11% increase over the year-earlier period. JPMorgan’s net interest income reached a new quarterly record of $20.2 billion, up +48% from the year-earlier level. The same at Bank of America increased +29% to $14.7 billion and Wells Fargo’s ((WFC - Free Report) ) jumped by more than +45%.
The unflattering year-over-year profitability comparisons for each of these companies – JPMorgan’s earnings increased +5.9%, Bank of America’s increased by +1.7% while Citigroup and Wells Fargo suffered declines of -43.3% and -50.2%, respectively - are primarily a function of differences in how reserves or provision for loan losses behaved in the two periods. All of these banks booked reserves for loan losses given the coming economic weakness while they were releasing previously booked reserves in the year-earlier period.
In terms of the Finance sector scorecard, we now have results from 22.1% of the sector’s market capitalization in the S&P 500 index. Total earnings for these companies are down -13.4% from the same period last year on +6.8% higher revenues, with 85.7% beating EPS estimates and 57.1% beating revenue estimates.
Looking at the Finance sector as a whole, total Q4 earnings for the sector are expected to be down -8.3% on +2.5% higher revenues.
For the Zacks Major Banks industry, which includes all of the aforementioned banks and accounts for roughly 40% of total Finance sector earnings, total Q4 earnings are on track to be down -10.3% from the same period last year on +8.8% higher revenues.
The table below shows the sector’s Q4 earnings and revenue expectations at the ‘medium’ industry level in the context of what the space reported in the preceding period and what is expected in the following quarter.
Image Source: Zacks Investment Research
As noted earlier, skeptics of the banking industry argue that the group ends up giving away all the profits that it had accumulated during the good times when the macro environment turns south. The Covid downturn was an anomaly in that respect, but there is some truth to the allegation.
We will see how the economic picture unfolds in the coming quarters, but the credit quality metrics in the reported Q4 results do not point towards any imminent deterioration.
The earnings growth picture for the Finance sector is expected to improve in 2023, as we turn the page on tough comparisons even though the economic growth pace is expected to moderate under the cumulative weight of the Fed’s tightening. Finance sector earnings are expected to be up +11.2% in 2023 on +4.4% higher revenues, which would follow the -13.6% earnings decline on +1.1% higher revenues in 2022.
2022 Q4 Earnings Season Scorecard
Including results from all the banks, we now have Q4 results from 29 S&P 500 members or 5.8% of the index’s total membership. Total earnings for these 29 index members are down -10.5% from the same period last year on +7.5% higher revenues, with 75.9% beating EPS estimates and 65.5% beating revenue estimates.
The Q4 reporting cycle accelerates this week, with more than 65 companies coming out with quarterly results, including 25 S&P 500 members. Most of the companies reporting this week are from the Finance sector, but we have few bellwether operators from other sectors on the docket as well. The notable companies outside of the Finance sector reporting this week include United Airlines (UAL) on Tuesday (1/17), Proctor & Gamble (PG) and Netflix (NFLX) on Thursday (1/19) and Schlumberger (SLB) on Friday (1/20).
The comparison charts below put the EPS and revenue beats percentages in Q4 in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the earnings and revenue growth rates in Q4 in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows the expected 2022 Q4 earnings and revenue growth expectation in the context of where growth has been in recent quarters and what is expected in the next few quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
Estimates for 2023 have been steadily coming down, as we have been flagging for some time now. You can see this in the chart below that shows how the aggregate earnings total for the index has evolved since the start of 2022.
Image Source: Zacks Investment Research
Please note that the $1.961 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $220.65, which compares to $216.89 in 2022.
The chart below shows this index ‘EPS’ has evolved since the start of 2022.
Image Source: Zacks Investment Research
From their peak in mid-April 2022, S&P 500 earnings estimates have been revised down by -9.9% for the index as a whole and by -12.1% on an ex-Energy basis, with much bigger cuts to estimates for the Construction, Consumer Discretionary, Retail, Tech and Aerospace sectors.
For more details about the evolving earnings picture, please check out our weekly Earnings Trends report here >>>> Are Earnings Estimates At Risk of Big Cuts in the Days Ahead