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- Big bank earnings season kicks off on Friday, with JPMorgan, Wells Fargo, and Citi set to share fourth-quarter 2020 results.
- Many bank stocks struggled for much of 2020 but have been on a tear recently, getting a boost from the Fed signing off on share buybacks in December, as well as the prospects of a general economic recovery.
- We checked in with bank analysts to hear what they’re keeping an eye out for.
- Visit Business Insider’s homepage for more stories.
Wall Street earnings season is about to get into full swing.
Big US banks are set to give fourth-quarter and full-year 2020 results in the coming days. Goldman Sachs is also planning on giving an update on a multi-year plan it laid out at its first-ever investor day last year.
Executives will lay out key drivers of their businesses and could shed insight on expectations and initiatives for the year ahead. While the fourth-quarter results will likely look brutal compared to the year-earlier period, thanks to factors like higher loan-loss provisions, lower fee-based revenue, and a less favorable interest-rate environment, bank watchers are thinking less about what kind of damage the coronavirus pandemic has already wrought and more about what lies ahead.
Meanwhile, bank stocks have been on a tear in recent weeks after struggling for much of 2020. The KBW Bank Index, which is a benchmark of banking-sector stocks, has risen some 35% since promising COVID-19 vaccine results were announced in early November.
“The market’s finally appreciating that an economic recovery is going to lead to higher profitability for the US banking sector, driven by lower credit costs, possibly wider margins, and fundamental loan growth led by the consumer, and that’s now showing up in stock prices,” Gerard Cassidy, head of US bank equity strategy at RBC, told Insider.
Still, any economic recovery could have some drawbacks when it comes to banks growing their loan books. If the economy is doing better, some reason, banks might see loan volume fall, not rise. It’s a tradeoff banks might expect in the new year as credit losses ease, D.A. Davidson equity analyst David Konrad told Insider.
Key to the story as well, of course, are interest rates. Net interest margin, or the difference between the interest banks charge borrowers and the interest they pay on deposits, is a key profitability metric. These margins collapsed this year as the Federal Reserve cut rates to near zero at the onset of the COVID-19 pandemic, but could be bolstered if a strong economic recovery takes hold, inflation expectations pick up, and longer-term interest rates begin to rise.
“If the curve stays where it is today, we see less downward pressure on the margin. But if it increases, we think there could be actual margin expansion for the group by the end of the year,” said RBC’s Cassidy.
It’s not so much that the Fed might raise its benchmark rate in the near term — the Fed has signaled that a rate hike might be off the table until 2023 — but rather that a steepening yield curve could play out favorably for banks.
“If the yield curve steepening, if the long end of the curve really blowing out, is a sign that the economic environment is materially improving and that we’re on a sustained path towards economic growth, then it makes sense that the yield curve steepening would have a very positive impact on banks,” UBS analyst Saul Martinez told Insider. “That’s an environment where loan growth picks up. That’s an environment where credit costs come down because the economy is doing well.”
When it comes to investment banking and sales and trading divisions, things should look pretty good. Trading revenues are generally expected to rise year-on-year, but could come back to earth a bit when compared to the third quarter’s blowout results. Meanwhile, equity capital markets revenue is expected to come in strong for the fourth quarter. And with a big slate of 2021 IPOs still to come, that could very well continue.
When it comes to loan quality, that’s perhaps the biggest question mark. Keep an eye on how banks adjust their loan-loss provisions, and what kind of outlook they give.
Here’s a rundown of key dates to know, and what to look for in the first batch of results when JPMorgan, Wells Fargo, Citi, and Bank of America report.
When are fourth-quarter 2020 bank results? Here’s a rundown of the big bank earnings calendar:
Friday, January 15
- JPMorgan: earnings release ~7:00 a.m. ET, analyst conference call 8:30 a.m. ET
- Wells Fargo: earnings release ~7:00 a.m. ET, analyst conference call 10:00 a.m. ET
- Citigroup: earnings release ~8:00 a.m. ET, analyst conference call 11:30 a.m. ET
- Bank of America: earnings release ~6:45 a.m. ET, analyst conference call 8:30 a.m. ET
- Goldman Sachs: earnings release ~7:30 a.m. ET, analyst conference call 9:30 a.m. ET
Wednesday, January 20
- Morgan Stanley: earnings release ~7:30 a.m. ET, analyst conference call 8:30 a.m. ET
Stock Market Citi: a flurry of new shakeups, and all eyes on what’s next when Jane Fraser takes the reins
As the exit of Citi CEO Mike Corbat approaches in February, industry-watchers will be keeping an eye out to get a clearer sense of the leadership style that his successor, Jane Fraser, intends to bring in.
“I think she hasn’t been very visible,” Jason Goldberg, an equity analyst at Barclays who covers large-cap banks, told Insider. “We certainly would expect that to change dramatically this year.”
It would be beneficial, Goldberg said, for investors to get a sense of “what to expect, and how she’s going to go about examining their businesses, their profitability metrics,” and how she’s going to try to close the gap between Citi and some of its peers.
On last quarter’s earnings call, a group of analysts including Mike Mayo of Wells Fargo and Erica Natarajan of Bank of America peppered Corbat with pointed questions about his leadership of the bank, why he didn’t immediately resign instead of announcing his forthcoming departure in 2021, and whether Citi had similarities with embattled Wells Fargo.
RBC’s Cassidy said the key issue to watch as Fraser steps into her new CEO role at Citi will be whether she looks to trim the bank’s global footprint and bring some of its success abroad back home.
“Even though from an asset standpoint and the global footprint, Citi is very large, when it comes to consumer banking in the United States, outside of credit cards, it doesn’t have the size of its peers. So it will be interesting to see if she tries to bring in the global footprint in there,” Cassidy said.
Nonetheless, among Fraser’s chief tasks as CEO will be to get a handle on a regulatory consent order requiring the bank to fix its risk systems, as well as the fallout from Citi’s mistaken $900 million payment to Revlon creditors in August. But it’s likely bank watchers will give Fraser a moment to settle in.
“I also want to give her a little bit of time. She has the advantage from Charlie in the sense that she’s been there for an extended period of time,” D.A. Davidson’s Konrad said, comparing Fraser to Wells Fargo CEO Charlie Scharf, who stepped into his current role in 2019 after stints at the helm of Visa and BNY Mellon.
Citi had a number of big leadership announcements this week. It’s forming a new wealth management division that will be led by Citi veteran Jim O’Donnell, according to a memo to employees on Wednesday.
Also on Wednesday, Citi named Shahmir Khaliq as its head of treasury and trade solutions (TTS), effective immediately. Though it flies under the radar, TTS has for years been the industry leader in transaction banking and one of Citi’s most powerful drivers of profit and growth.
The group, considered the backbone of the company by top execs, manages everyday cash and borrowing concerns for the largest companies — think Walmart, Boeing, and Microsoft — and government organizations across more than 100 countries. Net margins are wide, and revenues hit $10.3 billion in 2019, up 37% in five years.
But in 2020, as trade flows were disrupted amid the pandemic and companies spent less on their corporate credit cards, the unit saw average loan volumes fall 7% through the third quarter to $67.1 billion, while deposits soared 21% to $150.1 billion.
Meanwhile, Anand Selva, who previously was CEO of Citi’s US consumer bank, has taken over for Fraser as head of global consumer banking at Citi.
And on Tuesday, Citi announced a handful of senior promotions for its consumer bank. In a memo, Selva announced that Gonzalo Luchetti, head of consumer banking in Asia Pacific and EMEA, would become head of US consumer banking, effective Feb. 1. And David Chubak, head of US retail banking, and Craig Vallorano, head of Citi Retail Services, will swap roles starting May 1.
Mark Mason, Citi’s CFO, had said in September that the bank viewed the Revlon incident as a chance to make changes.
“We recognize that errors like this are unacceptable. And we also recognize that eliminating these types of manual touch points is a significant opportunity for us,” Mason said at the time.
Read more Citi news:
- Read the full memo from Citi’s top brass revealing its new wealth division on the heels of big consumer bank leadership changes
- Citi just announced a leadership reshuffle in its consumer bank as new head Anand Selva takes the reins, and the promotions point to a big digital push
- Citi just snagged a wunderkind from Credit Suisse to lead its equities research as it looks to climb the league tables
Stock Market Wells Fargo: strategic update, details on investment banking push
To say Charlie Scharf, a one-time protege to JPMorgan’s Jaime Dimon, has had his hands full since taking the helm of Wells Fargo in 2019 is an understatement.
The bank has announced a flurry of restructuring efforts and expense cuts since Scharf took over, all while dealing with its own consent orders and an asset cap imposed by the Federal Reserve following a phony account scandal that first emerged in 2016.
On Wells’ most recent earnings call, and at a Goldman Sachs investor conference in December, Scharf said that the bank planned to give a strategic update and more details on its expected 2021 expenses in January.
Most recently, Wells spun off its $10 billion student loan book to buyers reported to include Apollo and Blackstone. It’s also reportedly exploring the sale of its asset-management arm, which could fetch a price tag in the neighborhood of $3 billion dollars.
“They’re a big company just on the edge of just trying to get a bit more focused. They’ve combed through the portfolio and are just looking to jettison things that aren’t core to what they do, core to their customer base and where they have some sort of competitive advantage,” Barclays’ Goldberg told Insider.
So far, the executive’s plans have been generally well-received by Wall Street analysts, even if Wells’ stock price has lagged competitors. It’s mainly a question of whether it will be enough to boost the bank, and how quickly that might happen.
“They’ll have success in downsizing and restructuring the company. They’ll have the asset cap eventually lifted and the company will get back up on its feet. The question is, is it going to take six months or is it going to take three years?” said RBC’s Cassidy.
DA Davidson analysts wrote in their note that they see Wells’ recent sale of its student-loan business and the potential that it could also offload its investment-management and corporate trust businesses as a plus.
Meanwhile, the fourth-biggest US bank by assets has also expressed an interest in bulking up the part of the firm that handles dealmaking and trading.
Though relatively small in those businesses compared to, say, a JPMorgan, Wells Fargo early last year unveiled a new financial reporting structure that broke out its corporate and investment bank, which had previously been housed in Wells’ wholesale banking division, into its own business line.
It also named Jon Weiss, who had been running wealth and investment management, as CEO of the new CIB. Bloomberg reported earlier this month that Wells is now looking to grow its market share in M&A and underwriting.
Part of that push could come from doing more deals with middle-market companies, but Wells isn’t the first bank to have that idea. Others, including Bank of America, have already been making similar efforts.
Read more Wells Fargo news:
- How Wells Fargo CEO Charlie Scharf, who’s under fire for his ‘limited’ Black talent remark, filled the bank’s top ranks with white men from his JPMorgan days
- Wells Fargo execs are setting their sights on $10 billion in cost-cuts, putting layoffs and branch closures on the table. Here’s how it could play out.
Stock Market Bank of America: eyes on reserve releases, while seeing if tech bets pay off
Bank of America, meanwhile, is a prime example of how analysts view the benefits of banking at scale in the new year.
“We expect large, tech-oriented banks to show among the best medium-term operating leverage,” Wells Fargo analysts wrote in a note in January.
Investments in digital technology should also be a boost for Bank of America, said Martinez at UBS.
“They’ve been investing in technology quite a bit and being very proactive in terms of looking at the client relationship in its totality, as opposed to looking at individual products. There has been maybe a little bit more of an uneven performance across the franchise than at JPMorgan, but in retail banking they’re certainly at the top of the food chain,” he told Insider.
Like most of Wall Street watchers, Morgan Stanley analysts pointed out in a note that they’d like to see further clarification from the bank on the “trajectory of forward reserve releases.”
It’s a question that will hound most of the banks this earnings season – as the pace of the economic recovery from the pandemic picks up, to what extent will banks feel comfortable winding down their loan loss provisions and letting go of reserves?
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Read more Bank of America news:
- Fab Gallo, Wall Street’s longest-tenured equities chief, is leaving Bank of America months after having his power checked
- Bank of America wants to dominate middle-market investment banking. Here are the new teams, hires, and cities it’s adding to make that happen.