The biggest six U.S. banks, Citigroup (C, Financial), JPMorgan (JPM, Financial), Wells Fargo (WFC, Financial), Goldman Sachs (GS, Financial), Bank of America (BAC, Financial) and Morgan Stanley (MS, Financial), have all reported their second quarter earnings this past week.
Earlier in the week, Jim Cramer suggested the results from these big banks could be one of the biggest sink or swim catalysts for the stock market in the near-term. Across the list, Goldman Sachs and Morgan Stanley posted the best results for the quarter. Here are the highlights:
Goldman Sachs
Goldman Sachs had revenue of $13.3 billion, for a year over year gain of 41.49%. Revenue beat estimates by $3.54 billion. Earnings per share (EPS) were $6.26, increasing 7.75% from the second quarter of 2019 and beating estimates by $2.25.
Provisions for credit losses were $1.59 billion versus the $1.09 consensus. This is up from the $937 million in credit losses the company reported in Q1. Return on equity (ROE) of 11.1% was unchanged from the comparable second quarter of 2019. Year to date, Goldman Sachs has a stock return of -4.58%.
Analysts were impressed with the company’s capital markets revenue, showing the bank as a top investment banking choice among clients in recent months. The bank also reported record consumer deposits growth in the second quarter as it builds out its consumer offering, with help from its consumer lending platform Marcus.
Morgan Stanley
Morgan Stanley also reported a strong quarter. Revenue of $13.4 billion was up 30.86% from the comparable quarter of 2019. Revenue beat estimates by $3.01 billion.
Earnings per share gains were the best of the big banks group with an increase of 59.35% from the second quarter of 2019. Earnings per share of $1.96 for the quarter beat estimates by 85 cents.
Return on equity for Morgan Stanley was 15.7%, up from 11.2% in the second quarter of 2019. Morgan Stanley leads the pack’s stock returns with a gain of 1.82% year to date.
Revenues from trading were a highlight for the bank, with institutional securities net revenue of $7.98 billion for the quarter compared to the consensus of $5.39 billion.
JPMorgan
JPMorgan had revenue of $32.98 billion in the second quarter, beating estimates by $2.75 billion. Year over year, revenue was up 14.70%.
Q2 2020 GAAP EPS of $1.38 beat analysts’ estimates by $0.24. The company had a year over year EPS growth rate of -51.60%. Return on equity for the quarter was 7%, an improvement from 6% in 2Q 2019. Year to date, JPMorgan stock is down approximately -26.5%.
In the area of lending. JPM’s delinquency rates improved. Its provisions for credit losses of $10.47 billion was slightly higher in Q2 versus $8.29 billion in Q1 and the consensus of $8.73 billion.
Citigroup
Citigroup had revenue of $19.77 billion, beating the estimate by $710 million. Year over year, revenue was up 5.4%.
Q2 GAAP EPS of $0.50 beat the estimate by $0.10. Year over year, EPS was down -74%. Return on equity for the quarter was 2.4%, down from 10.10% in the comparable second quarter of 2019. Year to date, Citigroup stock is down approximately -33.8% for the year.
Delinquencies were lower for Citigroup. Its provisions for credit losses were below the consensus of $7.16 billion at $5.6 billion.
Wells Fargo
Wells Fargo reported revenue of $17.84 billion, missing the estimate by $460 million. Revenue was down -17% from the second quarter of 2019.
Q2 GAAP EPS of -$0.66 missed the estimate by $0.56 and was down -151% from the second quarter of 2019. Return on equity was negative at -6.63%, down -150% from the second quarter of 2019 when they reported ROE of 13.26%. For the year, Wells Fargo stock is down -51%.
Provisions for credit losses were $9.5 billion versus the consensus of $4.87 billion. Analysts liked Wells Fargo’s dividend cut, which helps to improve its reserves and working capital.
Bank of America
Bank of America reported revenue of $22.3 billion, a decrease of -3.38% from the second quarter of 2019. Revenue did beat estimates by $590 million.
Earnings per share for Bank of America were 37 cents, down -50% from the second quarter of 2019 and beating estimates by 8 cents. Return on equity for Bank of America was 5.34% in the second quarter, down -51% from the second quarter of 2019. Year to date, Bank of America’s stock has a loss of -29%.
Provisions for credit losses were below consensus at $5.1 billion vs. $5.27 billion. In the consumer segment, consumer banking net income of $71 million was disappointing compared to the Q1 report of $1.79 billion. Average deposit balances were basically unchanged at $1.66 trillion versus $1.44 trillion in Q1. Q2 global wealth and investment management net income of $624 million was down from $866 million in Q1. Average loans and leases of $1.03 trillion were basically in line with the $990.3 billion reported in Q1.
Final thoughts
Year to date, financials are down -21%. This compares to a small gain for the S&P 500 Index at approximately 0.72%. Morgan Stanley is leading the big banks with a gain of 1.82%, also beating the S&P 500.
Credit loss provisions and reserves are rising for the big banks and the banking industry. While this signals the higher risks of defaults, banks have also showed they have control over the lending risks, in my opinion. Dividend cuts and the Fed’s new Covid-19 dividend restrictions have some investors worried but will also integrate some cash support, which should help financial management.
Banks will be facing some new stress testing and regulatory reporting requirements from the Fed. This is another aggressive and proactive move which should surface any major issues from the big banks.
Several of the big banks are far into the negative on the share returns for the year. Given the controls in place, I think the substantial losses seem extreme.
Goldman Sachs appears to be a depositor of choice, but has a targeted clientele for the ultra-wealthy. Morgan Stanley is seeing a lot of investor confidence, with strength in trading as well as deposits and wealth management.
While I think it’s not likely for the big banks to fall much further, the strong quarter from Goldman Sachs and Morgan Stanley could be a sign that these two banks may emerge as the group’s stock leaders amidst the economic downturn.
Disclosure: I do not directly own any shares.
