- S&P 500 banks index trades near all-time highs
- Buoyant financial markets help investment banking operations
- Net interest margins seem resilient and cost control remains tight
- Investors will be on alert for any increase in loan impairments
- Buyback and dividend bonanza expected to continue
“Technology and AI-related stocks continue to dominate the headlines, but financial companies are a hugely important part of America’s stock market, and its economy, so the imminent third-quarter results season from the US megabanks should be particularly informative,” says AJ Bell investment director Russ Mould.
“JPMorgan Chase chair Jamie Dimon is expressing some misgivings about buoyant, even bubbly, US financial markets and the First Brands and Tricolor fiascos are raising fresh worries over excess borrowing in certain pockets of the economy. But the S&P 500 banks index trades near record highs all the same, and analysts are expecting a strong batch of results.
Source: LSEG Refinitiv data.
“Of the Big Four Main Street banks, JPMorgan Chase, Wells Fargo and Citigroup report their third-quarter figures on Tuesday 14 October and Bank of America will follow up on 15 October. Analysts expect each to show an improvement in their headline earnings per share (EPS) figure for the third quarter, though any outlook statements for the final three months of the year may be of greater interest.
Source: Company accounts, Marketscreener, Zack’s, NASDAQ, consensus analysts’ forecasts.
“The fourth quarter can be when the banks clean house and assess the quality of their loan books and swallow the bulk of a given year’s write-downs. Aggregate net income for the Big Four dropped by 5% year-on-year in Q2, but that was because of the base effect created by a $7.9 billion capital gain on the sale of Visa stock by JPMorgan Chase. Aggregate net income across the quartet rose by 19% year-on-year between April and June.
“A more modest 4% increase is expected for Q3, to an aggregate of $28.5 billion, and net income is seen coming in broadly flat year-on-year in Q4 at $28.1 billion across the Big Four.
Source: Company accounts, Marketscreener, Zack’s, NASDAQ, consensus analysts’ forecasts for Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
“This slowdown does not necessarily sit too comfortably with the S&P 500 banks index’s surge to new peaks this year, or forecasts of healthy GDP growth in the US. It makes more sense in the context of a stodgy housing market, a gentle increase in unemployment and some signs of increased consumer stress in terms of delinquencies on loans. It may also reflect the concern caused by the collapse of car parts maker First Brands and auto sub-prime lender Tricolor, which have raised fresh worries about the degree of borrowing, complexity and opacity in certain pockets of the US economy, in this case the automotive industry. JPMorgan Chase, for one, has been named as a lender to Tricolor.
“This all means that loan impairments will be a key number in the third quarter, alongside any guidance for potential losses in the fourth and final period of the year. Loan losses across the four have held relatively steady around $8 billion a quarter for the past five quarters.
Source: Company accounts.
“Aggregate loan and deposit growth have started to accelerate, which looks encouraging on the face of it, pending any questions on the quality of the loan book.
Source: Company accounts for Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
“Both trends could help earnings, given how net interest margins are holding relatively firm.
Source: Company accounts
“Aggregate net interest income across the four banks came in near record highs at $65 billion in the second quarter.
Source: Company accounts for Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
“Loan losses remain a potential wildcard, but the banks do not seem to be expecting any undue trouble, given the largesse they continue to offer shareholders in terms of dividends and share buybacks.
Source: Company accounts.
“The Big Four paid out $8.2 billion in dividends in the second quarter and bought back a further $19.9 billion in shares. A continuation of that run rate in Q3 and Q4 would take total cash returns across the quartet to $33 billion in dividends and $81 billion in buybacks, or $114 billion in all.
Source: Company accounts for Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
“That figure compares to their combined stock market capitalisations of $1.6 trillion for a cash yield of dividends plus buybacks of 7%, which easily beats inflation, returns on cash, as offered by the Fed Funds rate, and the benchmark 10-year Treasury yield.
“It does, however, lag the equivalent 10.2% ‘cash yield’ offered by the Big Five FTSE 100 banks – Barclays, HSBC, Lloyds, NatWest and Standard Chartered – although investors continue to afford the Americans a higher valuation, especially on the basis of price to tangible net asset, or book, value, even if their returns on tangible equity are no longer as superior as they once were.”
Source: Company accounts, Marketscreener, Zack’s, NASDAQ, consensus analysts’ forecasts.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. *Return on tangible equity
