While a few companies’ results have been trickling in already, Q4 earnings season kicks off in earnest starting on January 14th, when the major US banks start to report. As the repository for excess cash and the go-to place for new loans, banks serve as a bellwether for the “Main Street” economy as a whole.
Big U.S. banks expected to post uptick in core Q4 revenues on economic rebound
Analysts expect big U.S. banks to show an uptick in fourth quarter core revenues thanks to new lending and firming Treasury yields even while headline earnings will be mixed on differences in how each institution accounted for pandemic loan losses.
On Friday, JPMorgan Chase & Co and Citigroup Inc are expected to post roughly 20% and 30% declines, respectively, in profits compared with the year-earlier quarter, while Bank of America Corp's profits will be up 20% when it reports on Jan. 19, according to analyst estimates compiled by Refinitiv as of Friday.
Wells Fargo & Co, which also reports on Friday, is expected to show a 67% jump in profits.
That mixed performance will be largely due to the different pace at which banks started reversing accounting charges for pandemic-related loan losses which have not materialized. Other complicating factors are restructuring costs and asset sales at Citigroup and Wells Fargo.
Goldman Sachs Group Inc and Morgan Stanley, meanwhile, are expected to report fourth-quarter profit declines of about 7% and 2%, respectively, as revenue from fixed-income trading income dipped from exceptional levels.
Broadly speaking, however, the picture is likely to be positive and analysts anticipate that bank executives will sound an optimistic note on the outlook for core earnings.
Operating profits are expected to rise as the continued economic recovery boosted loan growth and as yields from banks' Treasury securities edged up, or at least held steady, during the quarter.
"If investors look under the hood, there is much good to be seen," Odeon Capital Group analyst Dick Bove wrote in note on Thursday.
Overall, core profits for big banks will be up about 6% on average after stripping out loan loss provisions, taxes and unusual items, Goldman Sachs analyst Richard Ramsden estimated.
More consumers and businesses returned to their banks for credit during the fourth quarter after being propped up last year by government stimulus programs, analysts said.
Core loan balances at banks increased about 4% in the fourth quarter, the fastest growth in nearly two years, according to estimates by Deutsche Bank analyst Matt O'Connor, based on Fed data through Dec. 22. That strength came from both consumer credit card and business lending, he wrote in a note.
The quarter also offered a taste of the higher net interest income that could come as Treasury yields rise in 2022, according to Gerard Cassidy of RBC Capital Markets.
The difference in average daily yields between shorter- and longer-term government securities, known as the yield curve, increased slightly during the quarter.
Betting on these positive trends, investors pushed the KBW Bank Index up 35% in 2021, easily beating the S&P 500's 27% gain.
"A late pick-up in loan growth in 4Q, coupled with a recent rise in interest rates bode well for bank (guidance) on net interest income in 1Q22 and for the full year," wrote O'Connor.
With the economic outlook uncertain due to inflation and the Omicron COVID-19 variant, however, some investors are cautious on buying more bank stocks.
Doubts are growing about the Fed's ability to maintain the economic recovery on which lending growth relies after the central bank last week released minutes from its latest policy meeting that showed officials might raise interest rates sooner than expected to slow inflation.
Jason Ware, chief investment officer for Albion Financial Group, said he is evaluating whether to buy more bank stocks but is hesitant, partly due to caution about whether higher yields are sustainable.
He's mindful, too, he added, of history suggesting that "bank stocks do better going into rate hikes than they do during rate hikes."
The good times will continue into 2022
Yet, many analysts think the good times will continue into 2022 and beyond, as several factors are putting a tailwind behind many banks.
For starters, economic activity continues to pick up in the U.S. and around the world, as total lockdowns due to the coronavirus pandemic become less and less likely.
Next, with inflation picking up significantly, the Federal Reserve Board seems likely to raise interest rates many times in 2022, which should help bank margins.
Rising interest rates benefit banks in several ways. For instance, the cost of borrowing will go up for consumers in the form of higher rates on credit cards and certain mortgages. In turn, this boosts banks’ profitability.
Five US banks in focus
JPMorgan Chase- Reports January 14th
Q4 Expectation: $2.965 in EPS, $29.931B in revenues
JPMorgan Chase & Co. last issued its earnings data on October 13th, 2021. The financial services provider reported $3.74 earnings per share (EPS) for the quarter, beating analysts' consensus estimates of $3.00 by $0.74. The firm had revenue of $29.60 billion for the quarter, compared to the consensus estimate of $29.63 billion. Its quarterly revenue was down 1.0% on a year-over-year basis. JPMorgan Chase & Co. has generated $15.81 earnings per share over the last year ($15.81 diluted earnings per share) and currently has a price-to-earnings ratio of 10.5. Earnings for JPMorgan Chase & Co. are expected to decrease by -20.51% in the coming year, from $14.97 to $11.90 per share.
Wells Fargo - Reports January 14th
Q4 Expectation: $0.999 in EPS, $18.837B in revenues
Wells Fargo & Company last posted its earnings data on October 14th, 2021. The financial services provider reported $1.17 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.99 by $0.18. The company had revenue of $18.83 billion for the quarter, compared to analyst estimates of $18.31 billion. Its quarterly revenue was down .1% compared to the same quarter last year. Wells Fargo & Company has generated $4.24 earnings per share over the last year ($4.24 diluted earnings per share) and currently has a price-to-earnings ratio of 12.6. Earnings for Wells Fargo & Company are expected to decrease by -19.18% in the coming year, from $4.64 to $3.75 per share.
Citigroup (C) - Reports January 14th
Q4 Expectation: $1.72 in EPS, $17.015B in revenues
Citigroup last announced its earnings results on October 14th, 2021. The reported $2.15 earnings per share (EPS) for the quarter, beating the consensus estimate of $1.92 by $0.23. The business had revenue of $17.15 billion for the quarter, compared to the consensus estimate of $16.93 billion. Its revenue for the quarter was down .9% compared to the same quarter last year. Citigroup has generated $10.70 earnings per share over the last year ($10.70 diluted earnings per share) and currently has a price-to-earnings ratio of 6.1. Earnings for Citigroup are expected to decrease by -26.02% in the coming year, from $10.80 to $7.99 per share.
Goldman Sachs- Reports January 18th
Q4 Expectation: $11.681 in EPS, $11.989B in revenues
The Goldman Sachs Group last issued its quarterly earnings results on October 14th, 2021. The investment management company reported $14.93 earnings per share for the quarter, topping the consensus estimate of $9.78 by $5.15. The company had revenue of $13.61 billion for the quarter, compared to analysts' expectations of $11.61 billion. Its revenue for the quarter was up 26.2% on a year-over-year basis. The Goldman Sachs Group has generated $60.63 earnings per share over the last year ($60.63 diluted earnings per share) and currently has a price-to-earnings ratio of 6.5. Earnings for The Goldman Sachs Group are expected to decrease by -34.18% in the coming year, from $60.65 to $39.92 per share.
Morgan Stanley- Reports January 19th
Q4 Expectation: $1.91 in EPS, $14.357B in revenues
Morgan Stanley last posted its earnings results on October 14th, 2021. The financial services provider reported $1.98 earnings per share for the quarter, topping analysts' consensus estimates of $1.68 by $0.30. The firm had revenue of $14.75 billion for the quarter, compared to analysts' expectations of $13.95 billion. Its quarterly revenue was up 26.6% compared to the same quarter last year. Morgan Stanley has generated $7.83 earnings per share over the last year ($7.83 diluted earnings per share) and currently has a price-to-earnings ratio of 13.2. Earnings for Morgan Stanley are expected to decrease by -7.28% in the coming year, from $7.97 to $7.39 per share.
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