If better-than-expected quarterly results from three of the country’s largest financial firms are any indication, there could be bargains lurking among bank stocks.
JPMorgan Chase (JPM (opens in new tab)$112.92), Wells Fargo (WFC (opens in new tab)$43.89) and Citigroup (C (opens in new tab)$43.55) marked the unofficial start of the third-quarter earnings season on Friday, and they did so on an upbeat note.
In fact, all three big banks beat Wall Street estimates for earnings per share, and by a wide margin.
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Shares from the three lenders rose sharply on the news even as the broader market sold off. It’s true that the market pretty much always overreacts – both up and down – immediately after a news event like a win.
But the lift that JPM, WFC and C showed after their respective earnings reports could only mean that bank stocks were smashed beyond measure on the way into what was widely expected to be a brutal third-quarter earnings season.
JPM’s bottom line beats the road
JPM, a component of the Dow Jones Industrial Average and the country’s largest bank by assets, on Friday reported a less-than-feared 17% fall in third-quarter profit as a surge in interest income cushioned a blow from higher loan loss provisions after a slump of business deals due to a deteriorating economic outlook.
Traditionally, rising interest rates are good for banks because they can charge consumers more, but the broader risk of an economic slowdown and higher borrowing costs could cloud the economic outlook and hurt future profits.
Chief Executive Jamie Dimon said in a statement that American consumers are continuing to spend and businesses are staying healthy.
However, he added that “significant headwinds are just ahead”, citing stubbornly high inflation leading to higher global interest rates, the uncertain impact of quantitative tightening, the war in Ukraine and the fragile state of oil supplies and prices led.
“While we hope for the best, we always remain vigilant and prepared for poor results.”
For the quarter, JPMorgan’s earnings fell to $9.74 billion, or $3.12 per share. Revenue rose 10% to $32.72 billion, helped by a 22% increase in fixed income trading revenue.
The bank’s adjusted earnings came in at $3.36 per share, according to Refinitiv data, well above analysts’ median estimate of $2.88.
Credit Suisse analyst Susan Roth Katzke said, “Put simply, JPMorgan has delivered solid results from top to bottom.”
Citigroup and Wells Fargo are also participating in the Beat Parade
Citigroup, the country’s third-largest lender by assets, reported net income of $3.5 billion, or $1.63 per share, for the three months ended September 30. Analysts had expected earnings of $1.42 per share on average.
True, the bank reported a 25% year-over-year fall in third-quarter profit, hurt by having to set aside more funds to cover bad loans due to a possible economic downturn and a slump in its investment banking business. However, there are numerous signs that Citigroup’s turnaround efforts are beginning to bear fruit.
Meanwhile, analysts were also overly pessimistic about Wells Fargo. The country’s fourth-largest bank reported a 31% fall in third-quarter profit, hurt by costs related to a fake account scandal and higher loan loss provisions.
However, like its peers’ stocks, WFC beat estimates. On an adjusted basis, the lender earned $1.30 per share, or well above Street’s guidance of $1.09 per share.
Of those three banking stocks, only WFC has outperformed the broader market so far this year. Wells Fargo shares are down nearly 12% year-to-date through Oct. 13. JPM and C lost 31% and 29%, respectively, during that period, while the S&P 500 lost 23%.
Meanwhile, there are numerous buying calls on the street
Any time a stock sells off this badly, bulls can usually point to valuation as a reason for a constructive review of a name. Fortunately for bulls, these banks’ quarterly reports make such arguments even more compelling.
And not for nothing, but industry analysts were already collectively optimistic about these three bank stocks at their current levels.
JPM gave a consensus buy rating in its third-quarter earnings report, albeit with somewhat mixed conviction. Of the 26 analysts who provided opinions on the stock tracked by S&P Global Market Intelligence, 10 gave it a “Strong Buy” rating, six said “Buy”, nine gave it a “Hold” rating and one called it “Strong Sell.”
Citigroup also earned a consensus buy rating with seven strong buy calls, two buys, 14 holds and one strong sell.
WFC, meanwhile, issued a consensus buy recommendation with strong conviction. Of the 26 analysts who have provided opinions on the stock, which is tracked by S&P Global Market Intelligence, 12 called it a strong buy, nine called it a buy and five called it a hold.
And make no mistake, we’re already seeing some analyst upgrades for these bank stocks. CFRA Research on Friday upgraded WFC from sell to hold on the bank’s third-quarter results.
The final result
If there was one silver lining on the road to what is likely to be the worst earnings season since the peak of the COVID-19 pandemic, it is this: Analyst estimates were so low that companies should stumble over them.
Last but not least, the results of JPM, C and WFC have achieved just that – at least as far as bank stocks are concerned.
Reuters reporters Mehnaz Yasmin, Lananh Nguyen, Niket Nishant and Noor Zainab Hussain contributed to this article.