Banks start releasing earnings tomorrow with Wells Fargo (
) and JP Morgan (
) kicking off the season. Bank lending
was mixed in Q3. As the graphic following displays, lending
to consumers has been slowly building and rising consistent with
the trend in recent years. Real estate lending has fallen
off after showing light signs of stability. It looks like higher
mortgage rates hurt demand. Commercial and
industrial loan growth rose early in Q3, but has flattened in
recent weeks. Lending data is not overly exciting for the sector
and does not bode well for strong profit growth.
The earnings trend:
The earnings outlook for the four largest U.S. banks has been
neutral to negative with earnings estimates under
pressure. The trend in estimates seems consistent
with the trend in lending as seen in the chart above.
JPM has seen its Q3 Zacks Consensus Earnings per Share
Estimate cut by 11 cents $1.29 and its Q4 EPS projection reduced
8 cents to $1.32 over the past thirty days.
There has been less movement at WFC. Q3 EPS projections are
flat for WFC over the past 30 days and expected Q4 EPS are down 1
cent to $0.97.
Over the past thirty days, Citigroup (
) has seen its Q3 Zacks Consensus Earnings per Share Estimate
decline 9 cents to $1.07 and its Q4 projection cut 1 cent to
$1.16. BankAmerica (
) has seen its Q3 EPS estimate reduced 1 cent to $0.18 and no
change to its Q4 forecast which is $0.29.
JPM, WFC, C, and BAC are all Zacks Rank #3 (Hold).
Net interest margin & Provision for loan
One positive for the large banks rests in net interest margin.
With treasury yields rising, net interest margins may have been
supported. The graphic following displays the pressure on
net interest margin since early 2010. However, net interest
margin has stabilized in recent quarters, and may have a chance
to uptick in Q3 and Q4 due to the rise in rates.
In contrast to net interest margin, provision for loan loss
for the major banks is nearly back to the levels seen before the
Great Recession. There is some room for loss provision to
inch lower, but this item on the income statement is likely to
start ranging. This will put a cap on earnings.
The table below displays the level of loan loss provision and
net interest margin for the banks. Notice that the loss
provision numbers from JPM and WFC were especially low last
quarter. It is harder to get a read on net interest margin,
but BAC has seen a lift recently. JPM has seen some
One of the negatives for the large banks rests in shrinking
revenues. Revenue growth is projected to contract for the big
four U.S. banks. Dodd Frank, capital requirements, a still weak
real estate market, and a general cautious view toward debt are
headwinds to revenue growth.
Earnings for the financial sector can be noisy. As a
result, many investors use tangible book value to value
banks. Tangible book value is a proxy for breakup
value. Based on this measure and Q2 asset valuation, WFC is
the most expensive bank with a price to tangible book value of
just over 2.0. C is the most inexpensive with a price to tangible
book value of 0.95. The graphic displays the trend in tangible
book value per share for the banks. Notice that the
valuations have been lifting in recent years but remain well
below the levels seen prior to the Great Recession.
Banks look inexpensive relative to the past 10 years, but
valuations are being restrained by the regulatory and slow growth
backdrop. One example rests in a recent wire story
highlighting JPM's exit from payday, certain auto dealer, and
pawn shop lending activities. JPM is also moving out of the
physical commodity and student housing businesses. Growth
opportunities seem to be shrinking from a political perspective.
The positive for the banks may rest in higher interest rates
which are able to expand net interest margins.
Given the headwinds to profit growth, it may also be worth
taking a look at the sector's PEG ratios - price to earnings
ratio divided by the growth rate. There are some
distortions given the impact of the Great Recession on earnings
and the growth rate in earnings. However, the data is provided
with a number of data points from C excluded because of not
meaningful data (these are the gaps in the chart).
The PEG ratios for BAC and C are at a slight discount to their
10 year median, while the PEG ratios for WFC and JPM are at a
premium. JPM looks most expensive. Although WFC is
trading at a large price to book value relative to the group, its
PEG ratio is reasonable. WFC also has the highest dividend yield
of the group.
Conclusions - go the Europe
Large banks are seeing pressure on their earnings estimates
and profits are unlikely to find support from already low loan
loss provisions. Expanding net interest margin may be
the best hope for strength if interest rates can continue their
rise and the economy can expand at a healthy rate. Valuation in
the sector is cheap on the basis of price to tangible book value,
but much less so based on the PEG ratio. Slow global growth
and regulatory headwinds are weighing on growth and valuations.
Given the valuation and growth picture, BAC or
C may be the best bets on hope for turnarounds and normalization
in the financial sector. WFC is attractive for its
dividend, and JPM is somewhere in between.
Those looking for a play in large financial institutions may
take a look at Deutsche Bank (
) and Credit Suisse (
). Both these names offer strong upward momentum to
earnings estimate revisions, and also have favorable technical
set ups. They were recently highlighted in "
3 Financial Charts to Bank On
Further, DB and CS are trading at discounts to their median
price to tangible book values. DB and CS have price to
tangible book values of 0.83 and 1.13 respectively. Their
ten year medians are 1.27 and 1.88 respectively. The PEG
ratio for DB is 0.59 compared to 0.88 for CS. Lastly, DB has a
dividend yield of 2.11%. CS does not pay a dividend. DB is
trading below its tangible book value and under its growth rate,
while paying a nice dividend.
Those looking to invest in large banks may want to go to Europe
where there is better value and a stronger earnings outlook. DB
and CS are both Zacks Rank #1 (Strong Buy) stocks. DB seems the
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis
DEUTSCHE BK AG (DB): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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