The second-quarter 2024 earnings for the Finance sector start tomorrow, with three big banks – JPMorgan JPM, Citigroup C, and Wells Fargo WFC – slated to announce quarterly numbers. Another big bank, Bank of America BAC, will come up with results on Jul 16.
Heading into the earnings season, investors seem to be tremendously bullish about these big banks’ quarterly performance. All four stocks touched 52-week/all-time highs in recent days.
America’s biggest bank – JPMorgan – scaled an all-time high of $210.83 per share on Jul 3, while Citigroup and Bank of America hit 52-week highs of $66.99 and $41.76 on Jul 10. Additionally, WFC stock touched its 52-week high of $62.55 per share on May 15. Notably, in the first half of 2024, JPM, C, WFC, and BAC outperformed the S&P 500 Index and the Zacks Banks – Major Regional industry.
First-Half Price Performance
Image Source: Zacks Investment Research
As you can see from the above chart, the industry has also outperformed the S&P 500 index. Yet, the stocks within the industry remain attractive from a valuation perspective.
Image Source: Zacks Investment Research
Before discussing the investment worthiness of these stocks, let’s see how the second-quarter results are likely to be.
Trends Leading Up to Q2 Results
The most important revenue source for banks is net interest income (NII). With the Federal Reserve expected to keep the interest rates high for a longer time, there has been a modest improvement in the lending scenario as the borrowers have accepted this fact. In the second quarter of 2024, demand for commercial and industrial, real estate and consumer loans (except credit card loans) was decent. Thus, JPM, C, WFC and BAC’s NII is expected to have been favorably impacted.
However, the inverted yield curve in the June -end quarter and high (but stabilizing) deposit costs are expected to have hurt NII expansion. Overall, we expected a stable or modest decline in NII for JPMorgan, Wells Fargo, Citigroup and Bank of America.
Now coming to non-interest income, we believe the metric will be a major game changer this time. With the resurgence of the investment banking (IB) business, JPMorgan, along with Citigroup and Bank of America, is expected to have witnessed a solid improvement in corresponding fees. Further, markets or trading revenues are expected to have improved this time as solid client activity offered support despite low volatility.
Apart from these, JPM, BAC, Citigroup and WFC are expected to have witnessed decent numbers for card fees. Also, JPMorgan and Wells Fargo are likely to have recorded a solid improvement in mortgage income despite high mortgage rates.
Another major factor we should take note of is the banks’ credit quality. For the past few quarters, JPMorgan, Wells Fargo, Citigroup and Bank of America have built huge reserves on the likelihood of loans turning delinquent because of the expected economic slowdown and tough operating backdrop. The second quarter is also not likely to be any different. These big banks are again expected to have recorded large provision for credit losses.
Earnings Whispers
Now, looking at these stocks individually, per our model, the chances of JPMorgan beating the Zacks Consensus Estimate are high. This is because the company has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
JPM has an Earnings ESP of +0.57% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here. You can see the complete list of today’s Zacks #1 Rank stocks here.
On the other hand, we cannot conclusively predict an earnings beat for C, WFC and BAC. All three have a negative Earnings ESP, though they carry a Zacks Rank #3.
Quarterly Estimate Revision Trends
Starting with JPMorgan, analysts have raised their second-quarter earnings estimates by 2.4% over the past two months to $4.19. The estimates imply a 4.1% decline for the prior-year quarter’s reported number. Similarly, for Wells Fargo, earnings estimates have moved 1.6% north in the past 60 days to $1.27, indicating 1.6% year-over-year growth
On the other hand, earnings estimates for Citigroup moved 2.1% lower over the past two months to $1.40, indicating 2.2% year-over-year growth.
Likewise, BAC’s earnings estimates for the to-be-reported quarter have been revised 2.5% downward to 79 cents in the same time frame. The estimate suggests a 10.2% fall from the prior-year quarter.
Buy, Sell, or Hold?
The resurgence of IB business, high rates, modest improvement in the mortgage business and decent loan demand paint a positive picture for these big banks ahead of second-quarter earnings. However, concerns over elevated expenses and deteriorating credit quality warrant caution.
Currently, the JPM, BAC, C and WFC stocks are trading near their respective highs, thus indicating that investors are highly optimistic about the second-quarter results. Hence, there is a big chance of near-term volatility as the markets interpret and incorporate updates following the earnings releases.
While long-term prospects for JPMorgan, Wells Fargo, Citigroup and Bank of America remain promising as the banking industry regains momentum, investors should not rush to buy them. Those interested in adding these stocks to their portfolios might be better off waiting until after the release of quarterly numbers for clarity and a potentially attractive entry point.
Those who already have JPM, BAC, C and WFC stocks in their portfolio can hold on to them because the banks are less likely to disappoint over the longer term.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
