Stock

Deep Dive: Get Prepared For A Good Season For Large US Banks

(Updates article with comments from David Konrad of D. A. Davidson on Morgan Stanley's Deal to Acquire Eaton Vance and Provide Loan Losses.)

Bank stocks usually fall during recessions. This time when the big players are well capitalized, largely free from the worst of credit losses, and benefiting from a recovering economy, investors may be looking for an opportunity to face them.

And the largest banks have clear advantages: fees from investment banking and asset management. (Below are tables of expected and historical provisions for loan losses, non-interest income, earnings per share, and analyst ratings for the top dozen US banks.)

The Hot Space – Asset Management

Morgan Stanley
MS,
-0.34%
has taken steps to become a premier wealth manager. On Thursday, the company announced that it would acquire Eaton Vance Corp. to take over.
EV,
-0.56%
for $ 7 billion in cash and stocks. Eaton Vance had $ 507 billion under management as of July 31, and Morgan Stanley said the combination would bring the assets under management of its Morgan Stanley Investment Management unit to $ 1.2 trillion.

It was not until October 2nd that Morgan Stanley completed the takeover of the discount broker E-Trade Financial. At that point, the bank announced that the company's total assets under management (AUM) had grown to $ 3.3 trillion. This represents a total pro forma total of $ 3.8 trillion in AUM, provided the acquisition of Eaton Vance is completed upon regulatory approval.

A Twitter post by Stephanie Link of HighTower Advisors underscored how hot the asset management business is:

Perhaps, given the asset bubble sparked by the Federal Reserve's nearly $ 3 trillion increase in the money supply (M2) this year, this should come as no surprise.

David Konrad, Managing Director and Senior Research Analyst at D.A. Davidson sees Morgan Stanley's actions as "reducing franchise risk" and improving return on equity.

"It enables them to make better use of the capital," which would otherwise be blocked by the temporary restrictions imposed by regulators on dividend increases and share buybacks, Konrad said in an interview on Thursday.

He said the Eaton Vance portion of Morgan Stanley's combined wealth management business is relatively safe from fee pressures than competing companies, given that Eaton Vance "has many individual individual accounts tailored to customers."

"We recommend buying the Morgans"

Even before Morgan Stanley's latest asset management success, Konrad wrote in a report on October 6: "We recommend buying the Morgans."

His "top idea" is Morgan Stanley because of its business mix, strong capital and the addition of e-trade. He wrote that J. P. Morgan Chase & Co.
JPM,
-0.57%
"Should regain its multiple" due to rising revenues, lower borrowing costs after a brutal first and second quarters and "increased visibility of its dividend".

Konrad prefers JPM over Bank of America Corp.
BAC,
+ 0.47%
as a long-term investment because it "offers better fee income growth by gaining market share in the capital markets" and because it offers higher returns on capital and a more attractive valuation of stocks when it takes their higher returns into account.

Konrad has neutral ratings for BAC and Goldman Sachs Group Inc.
GS,
-0.21%,
during the Citigroup Inc.
C,
+ 0.47%
a "buy" despite investor frustration with the stock, also because "both Citi and JPM have significantly higher reserves to credit ratios than BAC".

In the final table below, you can see that sell-side analysts as a group have the highest percentage of buy recommendations for Citigroup and expect their stock to rise the strongest among the 12 listed here next year.

Provisions and reserve coverage

A bank's quarterly provision for loan loss provisions is the amount that it adds to its loan loss provisions to cover expected losses on loans and leases. Yes, it moves money from one bucket to another, but it directly lowers revenue.

Here is a summary of the consensus estimates for third-quarter provisions among analysts surveyed by FactSet compared to actual provisions over the past four quarters for the top 12 US banks. The numbers are in billions, and you'll need to scroll the tables in this article to see all of the data:

Bank

ticker

Estimated provision for loan loss provisions – Q3 2020

Provision for risk provisions – Q2 2020

Provision for risk provisions – Q1 2020

Provision for risk provisions Q4 2019

Provision for risk provisions Q3 2019

Total assets as of June 30, 2020

J. P. Morgan Chase & Co.

JPM,
-0.57%

$ 2,885

$ 10,473

$ 8,285

$ 1,427

$ 1,514

$ 3,213,115

Bank of America Corp.

BAC,
+ 0.47%

$ 2,236

$ 5,117

$ 4,761

$ 941

$ 779

$ 2,741,688

Citigroup Inc.

C,
+ 0.47%

$ 4,004

7,903 USD

$ 6,446

$ 2,197

$ 2,071

$ 2,232,715

Wells Fargo & Co.

WFC,

$ 1,921

$ 9,534

$ 4,005

$ 644

$ 695

$ 1,968,766

Goldman Sachs Group Inc.

GS,
-0.21%

$ 550

$ 1,590

$ 937

$ 336

$ 291

$ 1,141,523

Morgan Stanley

MS,
-0.34%

N / A

$ 246

$ 292

$ 0

$ 0

$ 975,363

US Bancorp

USB,
-0.83%

$ 806

$ 1,737

$ 993

$ 395

$ 367

$ 546,652

Truist Financial Corp.

TFC,
+ 0.34%

$ 603

$ 844

$ 893

$ 171

$ 117

$ 504,336

PNC Financial Services Group Inc.

PNC,
-0.91%

$ 394

$ 2,463

$ 914

$ 221

$ 183

458,978 USD

Bank of New York Mellon Corp.

BK,
+ 1.39%

$ 40

$ 143

$ 169

– $ 8

– $ 16

$ 442,316

Capital One Financial Corp.

COF,
-0.49%

$ 2,160

$ 4,246

$ 5,423

$ 1,818

$ 1,383

$ 421,296

State Street Corp.

STT,
+ 2.20%

$ 18

$ 52

$ 36

$ 3

$ 2

$ 280,242

Source: FactSet

In a year of economic turmoil, quarter-to-quarter comparisons can be more important than year-to-year comparisons. So the table has both, and you can see that analysts expect the provision for reserves to be much less painful in the third quarter than it was in the first half of 2020.

Richard Bove, an analyst for Odeon Capital Group, described the provision for the third quarter in his own report on forecasting bank profits for customers as "the most critical of all figures produced in the quarter." He expects "a relatively good number of numbers" but cautioned that negative surprises would result in significant declines for the stocks, even given their current discounted valuations.

Bove cited a decline in commercial and industrial credit and "moderate growth elsewhere" as one of the reasons for the decline in provisions, but also wrote that "it appears that banks reserved too much in the first half of the year".

Banks look ahead when they put reserves aside. It takes time for a loan to go through overdue cycles and be written off. This means that the third quarter depreciation will increase from the second quarter onwards. Looking ahead, however, investor reaction to this bad news could be tempered by lower reserves.

Konrad said Thursday that he expected the largest banks' loan loss provisions to have "decreased significantly", with consumer-side loan write-off activity "fairly stable", although commercial write-offs could be "lumpy".

Non-interest income

Interest income will be put under pressure this year from the Federal Reserve's bond purchase, which has depressed long-term interest rates. US ten-year treasury bills
TMUBMUSD10Y,
0.777%
a poor return of 0.77% after an already low 1.92% at the end of 2019.

For Goldman Sachs, Morgan Stanley and J.P. Morgan Chase led an increase in bond issuance in the first quarter to an increase in investment banking income. For the three banks, noninterest income is expected to decline sequentially in the third quarter, but still increase year over year. The numbers are in billions:

Bank

ticker

Estimated Noninterest Income – Q3 2020

Noninterest income – Q2 2020

Noninterest income – Q1 2020

Noninterest income – Q4 2019

Noninterest income – Q3 2019

J. P. Morgan Chase & Co.

JPM,
-0.57%

$ 14,911

$ 19,127

$ 13,812

$ 14,165

$ 15,113

Bank of America Corp.

BAC,
+ 0.47%

$ 10,476

$ 11,478

$ 10,637

10,209 USD

$ 10,620

Citigroup Inc.

C,
+ 0.47%

6,501 USD

$ 8,686

$ 9,239

$ 6,381

$ 6,933

Wells Fargo & Co.

WFC,

$ 8,266

$ 7,956

6,405 USD

$ 8,660

$ 10,385

Goldman Sachs Group Inc.

GS,
-0.21%

$ 8,789

$ 12,351

$ 7,430

$ 8,890

$ 7,315

Morgan Stanley

MS,
-0.34%

$ 9,338

$ 11,814

$ 8,131

$ 9,424

$ 8,814

US Bancorp

USB,
-0.83%

$ 2,504

$ 2,614

$ 2,525

$ 2,436

$ 2,614

Truist Financial Corp.

TFC,
+ 0.34%

$ 2,004

$ 2,423

$ 1,961

$ 1,398

$ 1,303

PNC Financial Services Group Inc.

PNC,
-0.91%

$ 1,523

$ 1,549

$ 2,006

$ 2,121

$ 1,989

Bank of New York Mellon Corp.

BK,
+ 1.39%

$ 3,131

$ 3,221

$ 3,294

$ 3,963

$ 3,131

Capital One Financial Corp.

COF,
-0.49%

$ 1,157

$ 1,096

$ 1,224

$ 1,361

$ 1,222

State Street Corp.

STT,
+ 2.20%

$ 2,265

$ 2,378

$ 2,399

$ 2,368

$ 2,259

Source: FactSet

EPS estimates

Here are consensus estimates for third quarter earnings per share, comparing EPS for the group's last four quarters:

Bank

ticker

EPS estimate – Q3 2020

EPS – Q2 2020

EPS – Q1 2020

EPS – Q4 2019

EPS – Q3 2019

J. P. Morgan Chase & Co.

JPM,
-0.57%

$ 2.22

$ 1.38

$ 0.78

$ 2.57

$ 2.68

Bank of America Corp.

BAC,
+ 0.47%

$ 0.49

$ 0.37

$ 0.40

$ 0.74

$ 0.56

Citigroup Inc.

C,
+ 0.47%

$ 0.89

$ 0.50

$ 1.05

$ 2.15

$ 2.07

Wells Fargo & Co.

WFC,

$ 0.44

– $ 0.66

$ 0.01

$ 0.60

$ 0.92

Goldman Sachs Group Inc.

GS,
-0.21%

$ 5.28

$ 0.55

$ 3.11

$ 4.69

$ 4.79

Morgan Stanley

MS,
-0.34%

$ 1.24

$ 1.96

$ 1.01

$ 1.30

$ 1.27

US Bancorp

USB,
-0.83%

$ 0.90

$ 0.41

$ 0.72

$ 0.90

$ 1.15

Truist Financial Corp.

TFC,
+ 0.34%

$ 0.81

$ 0.67

$ 0.73

$ 0.75

$ 0.95

PNC Financial Services Group Inc.

PNC,
-0.91%

$ 2.02

$ 8.43

$ 1.95

$ 2.97

$ 2.94

Bank of New York Mellon Corp.

BK,
+ 1.39%

$ 0.94

$ 1.01

$ 1.05

$ 1.51

$ 1.07

Capital One Financial Corp.

COF,
-0.49%

$ 2.08

– $ 2.21

– $ 3.10

$ 2.25

$ 2.69

State Street Corp.

STT,
+ 2.20%

$ 1.41

$ 1.86

$ 1.62

$ 1.34

$ 1.42

Source: FactSet

Therefore, the top 12 US banks are expected to generate profits in the third quarter after provisions for loan loss provisions incurred losses for some of them in the past two quarters. These quarterly comparisons are far more important than blind comparisons with previous year's numbers.

Brian Kleinhanzl, managing director for large-cap banks at KBW, expects earnings per share of the nine largest US banks of 16% year-on-year for the third quarter, but wrote that the year-on-year declines have "slowed down" in the previous quarter . "He was cautious and rated the group as" equilibrium "as" short-term risks outweigh the long-term benefits that should emerge if the world economy makes a significant recovery, "he wrote in an October 1 report.

Ratings and price targets

Find rating summaries and consensus price targets among the analysts surveyed by FactSet for the 12 largest US banks. Scroll through the table below again to view all the data:

Bank

ticker

Share shares & # 39; buy & # 39; reviews

Share neutral reviews

Stock sales evaluations

Closing price – October 7th

Disadvantages price target

Implicit upside potential of 12 months

J. P. Morgan Chase & Co.

JPM,
-0.57%

67%

29%

4%

$ 99.73

$ 115.51

16%

Bank of America Corp.

BAC,
+ 0.47%

59%

41%

0%

$ 24.88

$ 28.96

16%

Citigroup Inc.

C,
+ 0.47%

81%

19%

0%

$ 44.84

$ 65.75

47%

Wells Fargo & Co.

WFC,

28%

61%

11%

$ 24.81

$ 30.35

22%

Goldman Sachs Group Inc.

GS,
-0.21%

62%

38%

0%

$ 203.60

$ 249.79

23%

Morgan Stanley

MS,
-0.34%

73%

27%

0%

$ 48.71

$ 59.76

23%

US Bancorp

USB,
-0.83%

38%

50%

12%

$ 38.79

$ 43.19

11%

Truist Financial Corp.

TFC,
+ 0.34%

63%

37%

0%

$ 42.03

$ 44.30

5%

PNC Financial Services Group Inc.

PNC,
-0.91%

42%

50%

8th%

115.18 USD

$ 119.85

4%

Bank of New York Mellon Corp.

BK,
+ 1.39%

53%

42%

5%

$ 36.46

$ 43.68

20%

Capital One Financial Corp.

COF,
-0.49%

69%

22%

9%

$ 78.24

$ 83.68

7%

State Street Corp.

STT,
+ 2.20%

37%

58%

5%

$ 63.41

$ 71.76

13%

Source: FactSet

Do not miss:16 stocks – from Adobe to Home Depot to Zillow – will help you capitalize on the real estate boom

Related Articles