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Fee Income Supports Big Banks' Q3 Earnings: What's Next?
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The four big banks — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) — released third-quarter 2020 results in mid-October. In this article, we are going to evaluate the performance of these Wall Street giants amid low rates, coronavirus pandemic and economic slowdown. Then we will check out what lies ahead of the banks.
Except Bank of America, the three banks outpaced the Zacks Consensus Estimate. Bank of America’s performance was hurt by rising credit costs and subdued fee income.
The common themes that favorably influenced the other three big banks’ results were strength in capital markets businesses and lower-than-expected credit costs. Also, initiatives by banks to upgrade technology for offering enhanced digitized services provided support.
However, near-zero interest rates put net interest income (NII) and net interest margin under pressure. Further, as economic growth and business activities were muted, demand for loan was soft during the quarter.
Let’s check out how these banks individually fared this time (in brief).
First off, the United States’ biggest bank (in terms of assets and market cap) – JPMorgan — witnessed improvement in trading, underwriting and mortgage banking businesses. These supported the company’s net revenues of $29.1 billion (relatively stable year over year) despite a 9% fall in NII. Further, this Zacks Rank #3 (Hold) company recorded net reserve releases, which led to lower credit costs. Provision for credit losses of $611 million were down 60%.
Bank of America disappointed investors with its quarterly results. Shares of this Zacks Rank #3 company fell 3.2% on the day of release of third-quarter numbers. As mentioned above, subdued fee income numbers (down 4%) along with reserve build in commercial loan portfolio and weak loan demand weighed on overall performance.
Talking about Citigroup, we see almost similar fee income trend as it was for JPMorgan. The company recorded a rise in both markets and underwriting revenues. Nevertheless, an 8% rise in credit costs and decline in loan balance were the undermining factors. Also, this Zacks Rank #4 (Sell) bank is embroiled in long-standing deficiencies in its risk management and internal controls processes. This could result in higher costs going forward.
Wells Fargo, which is under regulatory scrutiny for quite some time now, recorded impressive mortgage banking revenues and gains on trading activities. Further, this Zacks Rank #3 company was able to manage expenses prudently, which were almost flat year on year. However, lower loan balance, low interest rates and 8% increase in provision for credit losses were the major headwinds.
Road Ahead
The big question these large banks face now is will they be able to maintain/improve their financial performance. As we all know, the banks’ financial health depends directly on that of the economy. With third-quarter GDP of 33.1% and resumption of business activities across the nation, the U.S. economy seems to be gradually coming out of the woods.
Further, several other economic data point toward gradual economic revival. Hence, loan demand is expected to rebound and thus support NII to some extent despite the Federal Reserve signaling no change in interest rates, at least till 2023.
Additionally, investment banking business including advisory (performance of which was disappointing in the third quarter) is expected to perform well as equity and debt issuances along with M&As and restructuring activities will likely continue in the upcoming quarters.
Moreover, capital markets performance is likely to remain decent as volatility in the markets will continue, thereby leading to rise in client activity.
Nonetheless, we have to be cautious of the fact that the current health crisis isn’t yet over. A spike in coronavirus cases and shutting down of economies could again lead to business disruptions. Several European nations are already facing the second wave of the outbreak and have plans to implement large scale lockdowns again.
Further, stalemate over the new stimulus package is a concern. Banks are expected to witness an escalation in loan losses early next year as the current forbearance programs gradually end.
Therefore, it seems that road ahead of banks is likely to be a bumpy one.
These Stocks Are Poised to Soar Past the Pandemic
The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.
Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.
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Fee Income Supports Big Banks' Q3 Earnings: What's Next?
The four big banks — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) — released third-quarter 2020 results in mid-October. In this article, we are going to evaluate the performance of these Wall Street giants amid low rates, coronavirus pandemic and economic slowdown. Then we will check out what lies ahead of the banks.
Except Bank of America, the three banks outpaced the Zacks Consensus Estimate. Bank of America’s performance was hurt by rising credit costs and subdued fee income.
The common themes that favorably influenced the other three big banks’ results were strength in capital markets businesses and lower-than-expected credit costs. Also, initiatives by banks to upgrade technology for offering enhanced digitized services provided support.
However, near-zero interest rates put net interest income (NII) and net interest margin under pressure. Further, as economic growth and business activities were muted, demand for loan was soft during the quarter.
Let’s check out how these banks individually fared this time (in brief).
First off, the United States’ biggest bank (in terms of assets and market cap) – JPMorgan — witnessed improvement in trading, underwriting and mortgage banking businesses. These supported the company’s net revenues of $29.1 billion (relatively stable year over year) despite a 9% fall in NII. Further, this Zacks Rank #3 (Hold) company recorded net reserve releases, which led to lower credit costs. Provision for credit losses of $611 million were down 60%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bank of America disappointed investors with its quarterly results. Shares of this Zacks Rank #3 company fell 3.2% on the day of release of third-quarter numbers. As mentioned above, subdued fee income numbers (down 4%) along with reserve build in commercial loan portfolio and weak loan demand weighed on overall performance.
Talking about Citigroup, we see almost similar fee income trend as it was for JPMorgan. The company recorded a rise in both markets and underwriting revenues. Nevertheless, an 8% rise in credit costs and decline in loan balance were the undermining factors. Also, this Zacks Rank #4 (Sell) bank is embroiled in long-standing deficiencies in its risk management and internal controls processes. This could result in higher costs going forward.
Wells Fargo, which is under regulatory scrutiny for quite some time now, recorded impressive mortgage banking revenues and gains on trading activities. Further, this Zacks Rank #3 company was able to manage expenses prudently, which were almost flat year on year. However, lower loan balance, low interest rates and 8% increase in provision for credit losses were the major headwinds.
Road Ahead
The big question these large banks face now is will they be able to maintain/improve their financial performance. As we all know, the banks’ financial health depends directly on that of the economy. With third-quarter GDP of 33.1% and resumption of business activities across the nation, the U.S. economy seems to be gradually coming out of the woods.
Further, several other economic data point toward gradual economic revival. Hence, loan demand is expected to rebound and thus support NII to some extent despite the Federal Reserve signaling no change in interest rates, at least till 2023.
Additionally, investment banking business including advisory (performance of which was disappointing in the third quarter) is expected to perform well as equity and debt issuances along with M&As and restructuring activities will likely continue in the upcoming quarters.
Moreover, capital markets performance is likely to remain decent as volatility in the markets will continue, thereby leading to rise in client activity.
Nonetheless, we have to be cautious of the fact that the current health crisis isn’t yet over. A spike in coronavirus cases and shutting down of economies could again lead to business disruptions. Several European nations are already facing the second wave of the outbreak and have plans to implement large scale lockdowns again.
Further, stalemate over the new stimulus package is a concern. Banks are expected to witness an escalation in loan losses early next year as the current forbearance programs gradually end.
Therefore, it seems that road ahead of banks is likely to be a bumpy one.
These Stocks Are Poised to Soar Past the Pandemic
The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.
Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.
See the 5 high-tech stocks now>>