The Long and Short
Citi, JPM and Wells kick off earnings season
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The latest earnings season for banks has kicked off with JP Morgan, Citigroup and Wells Fargo all reporting results that mostly exceeded expectations. All three banks recorded top-line results that exceeded analysts’ consensus forecasts, while higher rates appeared to mostly serve the banks’ bottom-lines. After bank spreads widened this spring following the collapse of Silicon Valley Bank and Signature Bank, these bellwether results underscore the continuing good relative value of the sector.
In recent weeks, the banking sector has offered some of the best relative value in the investment grade corporate bond index with some of the best current opportunities to outperform the broader market. The initial takeaway from this first blast of US bank earnings supports this position on a fundamental basis. Operating results and credit posture of three of the most prolific banks in the sector provide evidence of stability and operating momentum in a challenging rate environment. While regional banks appear to offer the better longer-term valuation amidst greater volatility, the stability of the Big 6 US money center banks offers compelling value at current spreads.
JPM (JPM: A1/A-/AA-) notably saw record net interest income, and raised full-year guidance, due partially to the addition of First Republic—the bank added through an FDIC-assisted deal at the height of the spring regional bank crisis—but also as higher rates and higher credit card balances appeared to have a positive impact on results. With regard to the regional banking crisis, JPM CEO Jamie Dimon stated that they believe the situation appears resolved for the time being, but the bank did express concern about the current geopolitical environment as potentially presenting global challenges moving forward.
Exhibit 1. C, JPM and WFC intermediate senior unsecured holding company curves
Source: Bloomberg/TRACE BVAL G-spread indications only
In the weeks leading up to this reporting season, there was rising speculation that the big US money center banks might be taking larger than expected credit charges to possibly increase reserves for future losses that might cut into their earnings results. So far, those concerns have proven mostly untrue with the three banks reporting today releasing reserves or recording modest additions to their reserves. JPM took a $1.38 billion provision for credit losses, which came in well below the consensus estimate of $2.49 billion. Similarly, JPM’s net charge-off of $1.50 billion also was below the $1.74 billion consensus expectation. The net result was a modest $120 million reserve release. Wells (WFC: A1/BBB+/A+) took a $1.20 billion provision for credit losses versus $864 million in net charge offs which resulted in just a modest $333 million change – hardly the significant reserve build that some were warning against. Similarly, Citi (C: A3/BBB+/A) had $1.64 billion in net credit losses with just a $125 million reserve build.
Overall results for Citi and JPM were boosted by their respective trading and investment banking operations. JPM’s fixed income trading revenue exceeded expectations at $4.51 billion versus the $4.36 billion estimate. This partially offset weaker than expected equities trading revenue of $2.07 billion versus the $2.27 billion consensus forecast. JPM’s investment banking revenue of $1.61 billion was down 6% year-over-year but exceeded the $1.48 billion forecast, as better than expected M&A advisory and debt underwriting revenue offset a disappointing showing in equity underwriting. Likewise, C’s third-quarter fixed income trading revenue of $3.56 billion beat the $3.25 billion estimate, driven by rates and currencies trading. This helped offset the softer than expected $918 million in equity trading revenue, which was down 3% year-over-year, hurt by a decline in equity derivatives. C’s investment banking revenue was up 34% (+12% excluding loan hedging) year-over-year to $844 million, lead by increased client activity in debt underwriting.
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