JPM, C, WFC: Q2 Profits Hide Underlying Risks !

Bank Stocks Performances.

US's largest banks have been drawing investors’ support as havens from commercial real estate woes

On Fri, 12 Jul 2024, $JPMorgan Chase(JPM)$, $Wells Fargo(WFC)$ and $Citigroup(C)$ reported their second-quarter earnings.

Their stocks have done well this year, and investors are putting money into them because they seem safer than other banks.

With their (a) diverse business models and (b) uptick in investment-banking activity, the bigger banks have been able to deflect concerns about exposure to office-property loans that have weighed on banks with fewer revenue streams.

During Q2 2024, of the trio:

  • Citibank’s stock price notched the largest gains, with a rise of +8.9%.

  • JP Morgan followed next with a +6.0% gain.

  • Wells Fargo was third with a +5.9% rise.

In comparison:

Earnings estimates for most of the big banks have increased during the course of the second quarter as analysts grew more favourable toward their abilities to generate profits.

Q2 2024 Earnings Summary.

Instead of dwelling on the 3 banks’ “better than forecast” second quarter earnings (see above), I will cut to the chase and share the “de-emphasized” nuggets of info that are weaknesses in the banks’ earnings.

Afterall, these are the shortcomings that might become potential potholes for them in the coming quarters or FY 2025.

Quarterly Earnings - Hidden Problems.

Shortcomings - JP Morgan.

(1) Net Interest Income (NII).

  • Net interest income (NII) growth has decelerated to +4% YoY to $22.9 billion, a significant slowdown from previous quarters.

  • Main cause/s - deposit margin compression across all business lines and lower deposit balances in the Consumer and Community Banking segment.

  • This implies the bank is facing increasing pressure on its core lending business as the interest rate environment becomes less favorable.

(2) Rising Credit Costs.

  • Another weakness was the substantial increase in credit costs.

  • Net charge-offs surged by 813 million YoY, driven by the credit card portfolio as newer vintages season and credit normalization continues.

  • JP Morgan also built up its loan loss reserves by $579 million due to card loan growth and adjustments to macroeconomic variables.

  • These indicate a deteriorating credit environment, which could pose significant risks to earnings in the coming quarters.

(3) Asset and Wealth Management Expenses

  • Asset and Wealth Management reported revenue growth of +6% YoY to $5.25 billion.

  • Division expenses has surged by +12% YoY (disproportionately when compared to revenue growth).

  • This was primarily due to increased compensation costs, including revenue-related compensation and investments in the private banking advisor team.

  • Although these are essential investments, for long-term growth, they put immediate pressure on profitability.

Shortcomings - Wells Fargo.

(1) Net Interest Income (NII).

  • Wells most pressing issue is the continued decline in Net Interest Income (NII).

  • It fell by -9% YoY, reflecting (a) the impact of lower interest rates and (b) a decrease in loan balances.

  • Persistent decline of this metric indicates a challenging operating environment for Wells Fargo.

(2) Loan and Deposit Balances.

  • Another bank’s concern is contraction in both loan and deposit balances.

  • This trend is illogical to what is typically expected during periods of rising interest rates.

  • Wells has attributed this to factors like (a) deposit shifts and (b) loan paydowns, it raises questions about Wells Fargo's ability to capitalize on the current interest rate environment.

(3) Rising Expenses.

  • Despite lower revenues, Wells Fargo's expenses increased YoY, mainly driven by (a) higher salaries and (b) benefits.

  • This is considered a negative development and puts pressure on profit margins.

  • Wells need to control costs effectively and improve profitability.

Shortcomings - CitiGroup.

(1) Deteriorating Credit Quality.

  • Its concern area is increasing credit costs ($2.5 billion vs $1.8 billion) YoY— a +38.89% surge in net charge-offs, primarily driven by the credit card portfolio.

  • This indicates a deterioration in credit quality, that could potentially erode profitability in the future.

(2) Diminishing Deposits.

  • Bank’s end-of-period deposits were approximately $1.278 trillion at second quarter end.

  • This is down by -3.49% YoY from $1.32 billion, due largely to reduction in Treasury and Trade Solutions, reflecting quantitative tightening.

(3) Margin Compression.

  • Net interest income (NII) was $13.49 billion for the quarter, down by -2.95% YoY.

  • This indicates potential margin compression as the bank faces challenges in expanding its lending business while managing interest rate risks.

Summary.

  • JP Morgan. Slowdown in NII growth, coupled with rising credit costs and elevated expenses in the Asset and Wealth Management division, highlight areas where the bank's performance could deteriorate further. Continue to monitor closely these trends in the coming quarters to determine bank's earnings power sustainability.

  • Wells Fargo.

    Similarly, declining NII, shrinking loan & deposit balances and rising expenses are significant headwinds for the bank to address. These challenges, coupled with the ongoing regulatory scrutiny, create a complex operating environment for Wells Fargo.

  • Citibank. Its declining NII reveal areas of weakness. Rising credit costs, increasing expenses, and margin compression pose challenges for the bank's future performance. Coupled with the regulatory red flags raised recently, Citigroup’s plate is full - keeping the bank occupied.

My viewpoints: (mine only)

There are overlapping weaknesses (so far) for the 3 banks with their Q2 earnings. (see below)

  • Declining Net Interest Income (NII): Despite higher interest rates, all three banks experienced a decrease in NII compared to the previous quarter. This suggests that the cost of funding has risen faster than the interest earned on loans.

  • Rising Credit Costs: The banks have increased their provisions for credit losses, reflecting concerns about a potential economic downturn and increased loan defaults.

It will be interesting to be able to confirm if these are “commonalities” amongst all the US bigger banks.

With the remaining banks due to report their second quarter earnings soon, would not have to wait too long for a complete picture to form:

  • Goldman Sacs (GS) - 15 Jul 2024.

  • Bank of America (BAC) - 16 Jul 2024.

  • Morgan Stanley (MS) - 16 Jul 2024.

With all sorts of banks’ data on hand, will it help us to better decide if US bank stocks are worth investing in the immediate and long term ?

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  • Do you think current 3 banks’ earnings are fantastic ?

  • Do you think US market will ignore the shortfalls and continue to bid on them to new highs?

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  • jollyfo
    ·07-17
    TOP

    Don't look now, but for the last 8 months JPM shares have been soaring. During that time frame they've moved from $135 to $210, a gain of 55%!!

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    • JC888
      Hi, tks for reading my post. This is exactly the Worrying part...
      Are all Bank stocks running at half tank and investors paying full price...
      Valuation is off balance?
      07-17
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  • Taurus Pink
    ·07-17
    TOP
    [龇牙] [龇牙] [龇牙]
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    • JC888
      Hi, tks for reading my post and support.. Did you notice that US bank stocks are still powering higher despite the hidden gaps? It's as if punters refused to acknowledge its existence... LOL....
      07-18
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  • marketpre
    ·07-16
    Risky gains! [Surprised] [Anger]
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    • JC888
      Hi, tks for reading my post. Hope u liked it.
      Do u agree Bank stocks are erratic in their performances of late....
      07-24
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  • JC888
    ·07-16
    Hi, tks for reading my post. I make time to write and share my post.
    Pls help to "Re-post". Tks! Rating is important (to me).
    Would you consider "Follow me" and get first hand read of my Daily new posts? Thanks!). Tks!
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  • KSR
    ·07-17
    👍
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    • JC888
      Hi, tks for reading my post. Glad you liked it. Banks are tumbling in part due to strong protectionistic stance by returng ex-president..
      07-18
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  • moobug
    ·07-17
    thank you
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    • JC888
      Hi, tks for reading my post. Hope u liked it. Interested in a Part 2 of the remaining bank stocks?
      Let me know.... Tks
      07-21
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