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Big Bank's Q4 Earnings Synopsis: Near-Term View Constructive

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Economic strength has mostly propelled fourth-quarter earnings of America’s big banks, making up for lower lending margins owing to falling interest rates. Much of the gains were driven by the rise in mortgage volumes. Non-lending business also contributed to profits but earnings for a few of the banks were hit by legal charges.

Investment Banking & Consumer Borrowing Aid Big Banks

Rebound in investment banking revenues and increased consumer borrowing drove big banks’ fourth-quarter 2019 earnings. Notably, banks with greater exposure to non-lending businesses, which include fees from investment banking and wealth management services, were able to compensate for lower profits from lending operations due to the cut in interest rates.  

Mortgage origination volumes, as American consumers boosted borrowings and spending, also nullified the banks’ contracted lending margins. Although consumer sentiments were strong, the prolonged tariff war between the United States and China dented borrowings and spending by companies. However, in the latter part of the fourth quarter, big banks’ business of catering to corporate clients got a boost as Washington and Beijing agreed on a phase-one trade accord. 

Earnings at a Glance

Retail banking along with contributions from corporate and investment banking helped JPMorgan Chase & Co. (JPM - Free Report) post strong fourth-quarter earnings. The largest U.S. bank reported earnings of $2.57 per share, which not only beat the Zacks Consensus Estimate of $2.32 but also improved from the year-ago quarter’s $1.98.

Notably, the bank witnessed a rise in credit card spending by customers, thanks to strong U.S. holiday retail sales and increased loan balances as customers took advantage of the cut in interest rates. Currently, JPMorgan sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The rise in investment banking and underwriting fees drove Bank of America’s (BAC - Free Report) fourth-quarter 2019 earnings. The second-largest U.S. bank by assets, carrying a Zacks Rank #2 (Buy), reported earnings of 74 cents per share, which trumped the Zacks Consensus Estimate of 68 cents and rose from the year-ago quarter’s 70 cents.

Citigroup Inc. (C - Free Report) also reported strong earnings for the fourth quarter, propelled by contributions from investment banking and consumer operations. The #2 Ranked firm reported earnings of $1.90 per share, surpassing the Zacks Consensus Estimate of $1.82 and improving from the year-ago quarter’s $1.61.

The diversified financial services holding company also reported a rise in credit card spending and loan balances.

Contributions from investment banking, wealth management, asset management and trading activities have also worked in favor of Morgan Stanley’s (MS - Free Report) fourth-quarter earnings. The Zacks Rank #1 firm’s fourth-quarter earnings were $1.20 per share, beating the Zacks Consensus Estimate of 98 cents and rising from the year-ago quarter‘s 73 cents.  

However, a flare-up in operating expenses along with legal charge associated to 1Malaysia Development Berhad scandal or 1MDB scandal overshadowed the strength in Goldman Sachs’ (GS - Free Report) underwriting business. The bank, carrying a Zacks Rank #3 (Hold), reported earnings of $4.69 per share, missing the Zacks Consensus Estimate of $5.20 and declining from the year-ago quarter’s $6.04.

Wells Fargo’s (WFC - Free Report) fourth-quarter 2019 adjusted earnings of 93 cents per share lagged the Zacks Consensus Estimate of $1.12 and fell from the year-ago quarter’s $1.21. The #3 Ranked stock’s weak quarterly earnings were primarily owing to costs associated to the fake-account scandal that has been haunting the company since 2016.

Constructive Outlook

The market witnessed Fed rate cuts thrice in 2019. Moreover, the futures markets are reportedly predicting another cut in 2020.

Although the low interest rate environment will continue to crimp the big banks’ lending margins, the demand for loan is likely to improve. To add to the positives, retail banking will continue to aid big banks since American consumers are in good shape with higher wage growth. The sentiments of corporate clients have also improved with the de-escalation in trade tensions and enhanced outlook for the American economy. Overall, the outlook for the banks looks encouraging, as agreed by JPMorgan Chief Financial Officer Jennifer Piepszak.

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