JPMorgan Chase, America’s largest bank kick off the banking sector’s first quarter earnings season on Friday before the market opens along with three of the largest U.S. lenders, Wells Fargo (WFC), Citigroup (C) and PNC. There is much to cover for banks in recent weeks with a potential overhaul of the insured deposits system, a rush of deposits out of regional banks to money center banks, heavy borrowing from the Federal Reserve’s discount window and a new Bank Term Funding Program set up to prevent further bank runs and failures. We got a clue of the tone from JPM CEO Jamie Dimon on April 4 in his annual letter to shareholders that the banking crisis is not over.
Perhaps appropriately embattled California-focused First Republic Bank (FRC) actually delivers earnings on Thursday. First Republic received $100 billion in Fed loans and emergency deposits in March.
JPM Earnings Preview
Q1 2023 earnings release at 6:45 a.m. ET; conference call at 8:30 a.m. ET
- Projected EPS: $3.40 a share, down from a projection of $3.43 a share on Feb. 28 but ahead of the Dec. 30 estimate of $3.35 a share.
- Projected revenue: $36,070 billion: +14.18% year-on-year (YoY)
Jamie Dimon’s Shareholder Letter
While we don’t run the company worrying about the stock price in the short run, in the long run we consider our stock price a measure of our progress over time. This progress is a function of continual investments in our people, systems and products, in good and bad times, to build our capabilities. These important investments will also drive our company’s future prospects and position it to grow and prosper for decades. Measured by stock performance, our progress is exceptional. For example, whether looking back 10 years or even farther to 2004, when the JPMorgan Chase/Bank One merger took place, we have significantly outperformed the Standard & Poor’s 500 Index and the Standard & Poor’s Financials Index.From JPM Shareholder Letter
Investment Banking Losses
JPMorgan investment banking fees weakness has been exacerbated by a decline in large private-equity buyouts. Last quarter:
- Investment Banking Revenue: $1.39B (exp $1.66B), revenue fell 9% and profit dropped 27%.
- Fees for advising on mergers and stock and debt sales fell 58%,
Unrealized Losses on Investment Securities: How large are the losses, have losses been taken and are they hedged? This will affect ROE and EPS. Simply the value of assets held has been diminished, but by how much?
- $874 million in losses selling some U.S. Treasurys and mortgage-backed securities,
- Offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.
JPMorgan Last Quarter Earnings
Higher rates increase margins but there is a cost
Understandably there is a crisis of confidence in regional banks sparked off by last month’s collapse of Silicon Valley Bank. We warned last quarter higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
“US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses… Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms… The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period.” April 7 – Bloomberg (Alexandre Tanzi)
Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Analysts Outlook on Banks
KBW reduced its earnings estimates for banks across the board by 8% for 2023 and 11% in 2024,
“Bank stock performance around 1Q23 earnings will likely be dictated by relative balance sheet performance (deposits, liquidity and capital),” KBW said.
Morningstar– Eric Compton, CFA Apr 5, 2023
“Although we believe the U.S. banking sector as a whole is currently undervalued, the three banks that we think most deserve investor focus in the lead-up to first-quarter earnings are Comerica CMA, U.S. Bancorp USB, and Citigroup C. Each has its own risk/reward setup.
We believe the biggest risks to our top picks would be negative surprises on deposit bases or funding costs, or the realization of a recession in the near term. While we think the U.S. banks are already trading at recessionary valuations, an actual recession would be unlikely to help valuations in the short term.”
Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn. Consensus sees the bank setting aside an additional $308 million in loan-loss provisions in the first quarter, compared to the $208 million released in the same period a year ago.
Yet PNC is expected to hold up well to heightened scrutiny over bank deposits; according to data compiled by Bloomberg, the rate of funds leaving PNC’s balance sheet quarter-on-quarter is expected to slow to less than a percentage point, compared to about 1.5% a year ago. PNC’s ability to rein in expenses will also be assessed in its pre-open earnings report, with consensus seeing non-interest costs rise by about 6% from a year ago, the first increase in three quarters.
“1Q earnings will likely be pressured, in our view, as we see banks shift towards a more defensive and conservative stance, and we anticipate a slew of downward revisions to guidance,” Wedbush analysts said in a March 29 research note. “We expect loan growth to slow from the strong pace over the prior few quarters as demand cools in light of higher rates and the uncertain economic environment.”
Source: JPM, WFC, C, BLK,
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From The TradersCommunity Research Desk