Earnings season kicks off with big US banks – Stock Market News
October 13, 2020 3:29 pm
The third-quarter earnings season is finally here, with a horde of major US banks releasing their results this week. Bank of America, Goldman Sachs, and Wells Fargo will all report on Wednesday before Wall Street’s opening bell, and their numbers will give us a sense of not just how the financial sector is doing, but also how the US consumer is faring. Overall, a lot of gloom has been priced into the banking industry, which in some cases may present a long-term opportunity.
Financials hammered
Shares of major banks have been hit hard from the pandemic storm. Besides the broader recession sparking fears of a potential wave of defaults on loans, the financial industry is also plagued by the prospect of interest rates staying at zero for several years, which is devastating for the traditional banking business model.
Banks typically make most of their profits on net interest income, meaning the spread between the rate they loan out money minus the interest they pay on deposits. With interest rates stuck at zero and the Fed signaling they will stay there through 2023, this spread that banks make money off has narrowed dramatically, and this trend is expected to continue for some time.
On top of that, the Fed has banned US banks from buying back their own shares until the end of the year, to ensure they will remain well capitalized. While this is a prudent move to safeguard the wellbeing of the entire economy, it also removes a crucial source of support for banking stocks in the near term.
Reflecting all this, most large bank stocks have been decimated this year, and some haven’t recovered alongside the broader stock market. The S&P 500’s financial sector index is still down 17% year-to-date, whereas the S&P 500 itself is almost 9% higher. The shortfall implies investors are staying away from financials altogether, as the challenges the sector faces may not be resolved with a coronavirus vaccine.
Wells Fargo – a most hated stock
Even in a recession like this one, it is rare to see the third-largest US bank in terms of assets being among the worst performers on Wall Street, faring as badly as highly indebted energy companies or airlines. And yet, Wells Fargo has done just that, down 53% this year.
Part of that has to do with the legacy of the 2016 fake accounts scandal, after which the bank was punished with a limit on the maximum assets it can hold. The other part is how exposed Wells Fargo is to retail banking. Whereas many of its competitors also have investment banking services and trading arms to generate revenues from during a recession, most of Wells Fargo’s money is made from traditional consumer banking activities, leaving it exposed to low interest rates.
This quarter, the bank is forecast to report EPS of $0.49, which would mark a dramatic 58% decline from the same quarter last year. Of course, that would still be an impressive rebound from the latest quarter, when the bank reported losses of $0.66 per share.
Admittedly, at some point Wells Fargo will represent a good buying opportunity, but we are not there yet. The first step would be for the Fed to remove its asset cap on the bank, which would allow it to grow its balance sheet again and improve its top line.
Bank of America – market says ‘average’
The second largest US bank is down a whopping 28% this year, as most of its earnings also come from consumer or retail banking, a segment plagued by the low rates regime. In the third quarter, this giant is expected to report earnings per share (EPS) of $0.49, representing a 12% decline from the same quarter last year.
What’s interesting is that the stock is relatively attractive on a valuation basis. Let’s take a look at a simple valuation metric, the price-to-earnings ratio. This number denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, so the higher it is, the more ‘expensive’ a stock is considered.
Bank of America currently trades at just 12.9x forward earnings, which is quite cheap compared to the broader market, but in line with the overall financial sector. This implies that investors expect mediocre results over the coming years, even from a bank with a strong track record of beating earnings estimates.
Goldman – the attractive ‘vampire squid’
The famous New York-based investment bank is admittedly doing much better than its rivals on this list, as it does not rely much on consumer banking. Instead, the lion’s share of profits comes from trading, investing, and asset management activities, which the pandemic has not impacted much.
Reflecting all this, EPS is expected to have risen by 16% from the year-ago quarter, to reach $5.57. Additionally, the stock is down only 8% year-to-date, which is worse than the overall market, but miles ahead of many other financial firms. And this is without Goldman’s significant share buyback program, which has been put on halt temporarily.
In fact, Goldman looks attractive from a price-to-earnings perspective too, which currently stands at a very modest 10x for the coming year. That’s also reflected in book value, with the price-to-book ratio resting at just 0.9 currently.
The bottom line is that Goldman’s business model differs vastly from traditional banking giants, which allows it to weather this recession much better. Also considering the attractive valuation right now, the company might offer value for long-term investors.
The third-quarter earnings season is finally here, with a horde of major US banks releasing their results this week. Bank of America, Goldman Sachs, and Wells Fargo will all report on Wednesday before Wall Street’s opening bell, and their numbers will give us a sense of not just how the financial sector is doing, but also how the US consumer is faring. Overall, a lot of gloom has been priced into the banking industry, which in some cases may present a long-term opportunity.
Financials hammered
Shares of major banks have been hit hard from the pandemic storm. Besides the broader recession sparking fears of a potential wave of defaults on loans, the financial industry is also plagued by the prospect of interest rates staying at zero for several years, which is devastating for the traditional banking business model.
Banks typically make most of their profits on net interest income, meaning the spread between the rate they loan out money minus the interest they pay on deposits. With interest rates stuck at zero and the Fed signaling they will stay there through 2023, this spread that banks make money off has narrowed dramatically, and this trend is expected to continue for some time.
On top of that, the Fed has banned US banks from buying back their own shares until the end of the year, to ensure they will remain well capitalized. While this is a prudent move to safeguard the wellbeing of the entire economy, it also removes a crucial source of support for banking stocks in the near term.
Reflecting all this, most large bank stocks have been decimated this year, and some haven’t recovered alongside the broader stock market. The S&P 500’s financial sector index is still down 17% year-to-date, whereas the S&P 500 itself is almost 9% higher. The shortfall implies investors are staying away from financials altogether, as the challenges the sector faces may not be resolved with a coronavirus vaccine.
Wells Fargo – a most hated stock
Even in a recession like this one, it is rare to see the third-largest US bank in terms of assets being among the worst performers on Wall Street, faring as badly as highly indebted energy companies or airlines. And yet, Wells Fargo has done just that, down 53% this year.
Part of that has to do with the legacy of the 2016 fake accounts scandal, after which the bank was punished with a limit on the maximum assets it can hold. The other part is how exposed Wells Fargo is to retail banking. Whereas many of its competitors also have investment banking services and trading arms to generate revenues from during a recession, most of Wells Fargo’s money is made from traditional consumer banking activities, leaving it exposed to low interest rates.
This quarter, the bank is forecast to report EPS of $0.49, which would mark a dramatic 58% decline from the same quarter last year. Of course, that would still be an impressive rebound from the latest quarter, when the bank reported losses of $0.66 per share.
Admittedly, at some point Wells Fargo will represent a good buying opportunity, but we are not there yet. The first step would be for the Fed to remove its asset cap on the bank, which would allow it to grow its balance sheet again and improve its top line.
Bank of America – market says ‘average’
The second largest US bank is down a whopping 28% this year, as most of its earnings also come from consumer or retail banking, a segment plagued by the low rates regime. In the third quarter, this giant is expected to report earnings per share (EPS) of $0.49, representing a 12% decline from the same quarter last year.
What’s interesting is that the stock is relatively attractive on a valuation basis. Let’s take a look at a simple valuation metric, the price-to-earnings ratio. This number denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, so the higher it is, the more ‘expensive’ a stock is considered.
Bank of America currently trades at just 12.9x forward earnings, which is quite cheap compared to the broader market, but in line with the overall financial sector. This implies that investors expect mediocre results over the coming years, even from a bank with a strong track record of beating earnings estimates.
Goldman – the attractive ‘vampire squid’
The famous New York-based investment bank is admittedly doing much better than its rivals on this list, as it does not rely much on consumer banking. Instead, the lion’s share of profits comes from trading, investing, and asset management activities, which the pandemic has not impacted much.
Reflecting all this, EPS is expected to have risen by 16% from the year-ago quarter, to reach $5.57. Additionally, the stock is down only 8% year-to-date, which is worse than the overall market, but miles ahead of many other financial firms. And this is without Goldman’s significant share buyback program, which has been put on halt temporarily.
In fact, Goldman looks attractive from a price-to-earnings perspective too, which currently stands at a very modest 10x for the coming year. That’s also reflected in book value, with the price-to-book ratio resting at just 0.9 currently.
The bottom line is that Goldman’s business model differs vastly from traditional banking giants, which allows it to weather this recession much better. Also considering the attractive valuation right now, the company might offer value for long-term investors.
The post Earnings season kicks off with big US banks – Stock Market News first appeared on XM.
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