• Bank Stocks Had a Bonanza in 2019. Earnings Will Be More Blah

  By Ben Eisen David Benoit | January 12, 2020

  Topics: Share Buybacks, Banks, Earnings Announcements

  Summary: JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. report quarterly results Tuesday, followed by Bank of America Corp. and Goldman Sachs Group Inc. on Wednesday. Morgan Stanley MS reports Thursday. Falling interest rates were a mixed bag for big U.S. banks last year. That should be evident when they report fourth-quarter earnings this week. The Federal Reserve cut interest rates three times in 2019, an about-face after raising rates nine times in the previous three years. Lower rates crimp what banks can charge on loans, reducing the profitability on lending operations. But they can also fuel demand for loans and let banks lower what they pay for deposits. Banks are closely watched because their results typically reflect the health of the broader U.S. economy, which has slowed in recent months but generally remained strong.

  Classroom Application: This article provides an opportunity to discuss the US banking environment and, more specifically, the key drivers of banks' earnings, as well as P/E valuation, the role of share repurchases, etc.

• Article

  Article: Bank Stocks Had a Bonanza in 2019. Earnings Will Be More Blah.

  Lower rates were a mixed bag for big banks; heres what to watch for in banks quarterly results

  Falling interest rates were a mixed bag for big U.S. banks last year. That should be evident when they report fourth-quarter earnings this week.

  The Federal Reserve cut interest rates three times last year, an about-face after raising rates nine times in the previous three years. Lower rates crimp what banks can charge on loans, reducing the profitability on lending operations. But they can also fuel demand for loans and let banks lower what they pay for deposits.

  JPMorgan Chase JPM 2.00% & Co., Citigroup Inc. C 4.04%, and Wells Fargo WFC 5.21% & Co. report quarterly results Tuesday, followed by Bank of America Corp. BAC 1.53% and Goldman Sachs Group Inc. on Wednesday. Morgan Stanley MS 1.25% reports Thursday.

  Banks are closely watched because their results typically reflect the health of the broader U.S. economy, which has slowed in recent months but generally remained strong.

  KBW analysts expect big banks to post roughly 6% growth in fourth-quarter earnings compared with the prior year. But they expect earnings to fall about 6% from the third quarter.

  Net interest income, the amount banks make from lending minus what they pay out on deposits, fell quarter over quarter throughout 2019 after a streak of 15 straight gains. That is unlikely to improve much in the new year with rates expected to stay stable.

  That will put a greater focus on the other side of revenue: the fee-generating businesses included in non interest income. Those revenues have been rising as banks try to expand in areas considered more stable than Wall Street, such as wealth management and consumer lending.

  But lower rates have been a boon for consumer businesses such as housing and car loans. Lenders made $700 billion in mortgages in the third quarter, boosted by customers rushing to refinance. That was the most for a quarter since before the financial crisis, according to industry research group Inside Mortgage Finance.

  That hot streak is expected to remain largely intact, which should boost banks with big mortgage arms like Wells Fargo and JPMorgan. Freddie Mac said last week that the average rate for a 30-year fixed mortgage fell to 3.64%, its lowest level in 13 weeks.

  The business lending environment has been less sanguine, as executives fret over a continued trade war between the U.S. and China. Many companies, flush with debt after years of cheap borrowing, are opting not to take on more, analysts said. The pace of commercial and industrial loan growth slowed throughout 2019, according to Federal Reserve data.

  Quarterly investment-banking revenue should look strong, but that will be partly because of an easy comparison: Results were dismal in the fourth quarter of 2018. Zooming out from the quarter, trading revenue has been trending down across the industry. Banks are cutting costs and competing fiercely for clients, driven by a belief that only a few top shops can be profitable.

  In banks corporate-advisory businesses, results have been mixed. Global equity sales and mergers and acquisitions were down last year, though big-fee megamergers and debt deals were up, according to Dialogic.

  One factor that has been helping banks earnings over the past couple of years: buybacks. In the third quarter, Bank of America, Wells Fargo and JPMorgan were among the top four buyers of their own shares in the S&P 500, according to S&P Dow Jones Indices.

  All told, S&P 500 financial firms bought back almost $48 billion of shares in the third quarter, the most in records going back to 1998. Buybacks pull part of a companys stock out of the market, so its per-share earnings can improve even if its underlying profits dont.

  Partly because of buybacks, bank stocks had a strong run in 2019. JPMorgan, Bank of America and Citigroup all rose more than 40%, topping the broader market.

  Financials are still cheaper than the broader S&P 500, but they are getting more expensive. The S&P 500 financial sector now trades at around 13 times expected earnings over the next 12 months, versus less than 11 times a year earlier.

Article Question 1 Based on recent quarterly performance and trends referenced in the article related to corporate loans, mortgage origination, and investment banking, what are the expectations for the major US banks' in the fourth quarter?

Article Question 2 How much have banks referenced in the article spent on share repurchases and, according to the article, how do repurchases impact earnings and share prices?

Article Question 3 How do banks trade relative to the S&P 500 and how have banks' price/earnings ratio evolved during the past year?