The time has come to take a stock-picking approach to investing in banks. That was the lesson on Friday morning, when three of America’s biggest lenders released their fourth-quarter results.
Over the past two years, investors have been rewarded for investing heavily in the sector, as the
SPDR S&P Bank ETF
(KBE) climbed 28%. Investors who bought at the sector low in March 2020 were rewarded with bigger gains. Even in the first two weeks of the year, banks have been a winning investment: the banking ETF is up 10%, outperforming the 2.2% loss in the
But as the sector grows out of the effects of the pandemic, banks are no longer playing on the economic recovery. This makes the question of who is best positioned in the post-pandemic world more important for investors.
Take a look at the immediate reaction of stocks to the fourth quarter results of
(WFC). JPMorgan has been a darling for much of the pandemic due to an increase in trading activity and deal-making, but as trading levels recede from pandemic highs, it looks like the time either came for the other banks to shine.
Shares of JPMorgan slid 5% moments after Friday’s open, while shares of Citigroup were down 1.9%. Wells Fargo was the outlier, with shares up 2.6%. By the end of the day, JPMorgan was down 6.2%, Citigroup was down 1.3% and Wells Fargo was up 3.7%.
Here’s what we’ve learned so far about bank earnings and how lenders rank in some key areas.
Loan growth remains a wildcard. While investors are eager to see banks post higher loan growth, they may have to wait, based on Friday’s results. Loan growth stagnated – and in some cases declined – during the pandemic because businesses and households either felt too nervous to borrow or were inundated with cash as the government doled out cash to households for to restore economy.
JPMorgan was the winner, saying loans were up 6% year over year. The bank’s asset and wealth management division recorded an 18% increase, driven mainly by securities lending. Card and car loans also increased.
But at Wells Fargo, loan balances fell 3% from the end of last year, although the bank noted a recovery in loans in the second half of 2021. Citigroup saw a 1% decline in year-to-year loan balances.
A pick-up in loan growth would help banks, especially with the Federal Reserve poised to raise interest rates this year. This would widen the gap between the interest banks earn on loans and the interest they pay on deposits.
Costs are rising. And while investors may be willing to wait a little longer for loan growth to resume, they appear to have been less forgiving of higher spending.
JPMorgan posted higher-than-expected costs due to compensation, marketing and technology expenses. Worse, the bank said it expects full-year spending to grow nearly 9% to $77 billion in 2022.
Citigroup also posted higher spending. It saw an 18% increase due to recent divestitures and the bank’s efforts to streamline its operations after being hit with a consent order by regulators in October 2020 for weaknesses in its internal controls.
Wells Fargo went against the herd, posting an 11% drop in year-over-year spending due to fewer business sale employees and less reliance on consultants external. Wells Fargo’s efficiency ratio – a measure of expenses as a percentage of revenue – improved to 63% from 80% last year.
Trade is weak. Economic uncertainty for much of the past two years has allowed banks to profit generously from increased business activity, but those days may be over.
JPMorgan and Citigroup both saw 11% declines in trading revenue, with fixed income down double digits at both banks. Wells Fargo’s trading revenue was flat year over year.
Wall Street will get a better look at what awaits banks when
Bank of America
(BAC) and Morgan Stanley (MS) will release their results next week.
Write to Carleton English at [email protected]