JPMorgan, Wells Fargo, Citigroup and Bank of America are part of Zacks Earnings Preview
For immediate publication
Chicago, IL - October 12, 2020 - Zacks.com releases the list of companies expected to release earnings surprises. This week's list includes JPMorgan Chase & Co. JPM, Wells Fargo & Company WFC, Citigroup Inc. C, and Bank of America Corporation BAC.
Are bank stocks cheap or falling in value?
Zacks Major Banks industry stocks, which include JPMorgan, Wells Fargo, Citigroup and others who are on deck this week to report results, have rallied only marginally from their March 23 lows and are in significant proportions lagging behind the broader market. Even in this troubled environment, Wells Fargo is in a league of its own, with the stock continuing to lose ground for company-specific reasons.
JPMorgan, the undisputed banking leader, represented by the blue line in the graph above, has lagged since the market bottomed out. Bank of America and Citigroup, also on deck this week to report results, have done better than JPMorgan since March. However, this is only because they fell more on the pre-rebound sell-off. All of these major bank stocks are down more than -25% year-to-date, with Wells Fargo falling about twice as much for the seemingly never-ending company-specific saga.
This underperformance was driven by the Group's cyclical exposure, where demand for credit and other banking services is strongly correlated with GDP growth. The low interest rate level affirmed by the Fed will persist for a longer period of time and will put pressure on margins and net interest income.
The group is also suffering from a cyclical downturn due to the deterioration in credit conditions, which directly affects the quality of its assets (credit portfolios) as borrowers struggle to meet their obligations. Banks are required to increase their loan loss provisions, these provisions resulting from their quarterly profits. These reserve additions took a heavy toll on bank earnings in the first half, but the pace is expected to slow in Q3 reports.
In addition to traditional banking, the outlook for capital markets and investment banking remains favorable, with trading volumes in the third quarter well above the previous year's level. Activities on the advisory side of the business, such as M&A and equity / debt underwriting, continued their strong trend from the second quarter.
Third quarter total earnings for the Zacks Major Banks industry, which includes JPMorgan, Citi, Bank of America and others, is projected to decrease -37.9% year over year, a -6% decrease on revenue corresponds. This would follow the decrease in the group result of -68.4% in the second quarter.
Please note that the major banking industry generated 31.5% of total financial sector earnings over the past four quarters.
While the bank profit statement remains inconsistent, with a difficult background for conventional banking activities and favorable conditions for the capital market area, we see room for positive surprises in the Group's third quarter results. Net interest margins will remain under pressure, but the faster-than-expected economic recovery has likely helped these companies expand their loan portfolios at a pace that the consensus numbers don't reflect.
Expect these stocks to finally get a bid as they post favorable third quarter results. From a valuation point of view, taking into account all conventional valuation indicators, bank shares are particularly well placed. Let's take a look at the group that JPMorgan is using as a proxy for the Space, a stock that trades at a premium for the group because of its leadership position.
On a 12 month forward basis, JPMorgan stock is currently trading 58% of the S&P 500 multiple. This corresponds to a 5-year range of 94% at the high end to a low of 43% at the low end and a median of 66%. On a 12-month trailing book value basis, the stock is currently trading at 1.72X, compared to a 5-year high of 2.45X, a low of 1.18X, and a 5-year median of 1 , 89X.
I firmly believe that in today's technology dominated market, these bank stocks represent some of the best values for investors with a relatively longer holding horizon.
Q3 earnings season increases
While banks dominate this week's coverage, we also have a decent number of bellwethers from other sectors. In total, we will receive Q3 results from 43 companies this week including 26 S&P 500 members.
With results from 22 S&P 500 members whose fiscal quarters end as early as August already on the books that we and other data providers are counting as part of the Q3 balance sheet, we will see 46 results for that profitable season by the end of the week.
The S&P 500's total profit is expected to decline -22% in the third quarter compared to the same period last year, and revenue to decrease -2.9%. The earnings outlook has steadily improved since the beginning of the third quarter as economic and business activities resumed. While recent results in the labor market and the factory sector suggest some slowdown in the recovery, the recovery is still there and should support the improving earnings trend.
To get a sense of the favorable revision trend mentioned above, the current estimate of $ 286.2 billion for the third quarter is up from $ 283.6 billion last week.
The annual growth picture roughly corresponds to an "EPS" index of USD 127.39 for 2020, compared with USD 159.95 in 2019 and USD 158.88 in 2021.
For a detailed breakdown of overall results and expectations for the coming quarters, please read our weekly earnings report >>>> Q3 Bank Earnings Spotlight on Next Week
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JPMorgan Chase Co. (JPM): Free Stock Analysis Report
Bank of America Corporation (BAC): Free Stock Analysis Report
Citigroup Inc. (C): Free Stock Analysis Report
Wells Fargo Company (WFC): Free Stock Research Report
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