A big rebound for equities so far in 2019 overshadows the fact that bank stocks have had a rough ride over the past year.
First-quarter earnings season for the industry’s biggest players begins Wednesday when J.P. Morgan Chase and Wells Fargo release results. Analysts have been following their usual pattern, lowering estimates as we head into earnings season.
‘A better setup’
Before looking at earnings estimates, check out this one-year chart showing the total return (with dividends reinvested) for the KBW Bank Index BKX, +0.29% against the S&P 500 SPX, +0.10% :
FactSet
Banks were hit harder than the broader market was during the fourth quarter, as recession fears scared investors away from the sector. So far in 2019, the KBW Bank Index has returned 13.4%, trailing the S&P 500’s 16% recovery.
Even though he lowered his price targets for the “big four” U.S. banks, Jefferies analyst Ken Usdin wrote about “a better setup” for large-cap bank stocks in a report April 1. He did call the picture for the industry “complicated,” and a flat yield curve doesn’t help banks make money. But the Federal Reserve’s support for the economy could help bank stocks in the months ahead.
This chart shows the movement of forward price-to-earnings ratios for the big four in the past year:
FactSet
This table makes it easier to see:
Bank Ticker Price/next 12 months' estimated EPS Price/next 12 months' estimated EPS - year earlier J.P. Morgan Chase & Co. JPM, +0.32% 10.6 9.8 Bank of America Corp. BAC, +0.31% 9.8 12.9 Citigroup Inc. C, +0.79% 8.5 9.4 Wells Fargo & Co. WFC, +0.21% 9.5 11.9 Source: FactSet
So among the big four, all but J.P. Morgan Chase JPM, +0.32% have lower forward P/E ratios than they did a year ago. Analysts always expect shares of large banks to trade at a discount to the market — say, a P/E that is 70% as high as that of the S&P 500. But the benchmark index now trades for 16.7 times the weighted aggregate consensus earnings estimate among analysts polled by FactSet. Even 10 years later, the largest and most profitable of the big four is trading at a valuation of only 63% of the S&P 500’s forward P/E.
“Valuation is again compelling on its own,” Usdin wrote, because the well-capitalized banks continue to buy back shares, which boosts (or supports) earnings per share, even when the yield curve is flat. Banks are also expected by analysts to continue increasing dividends.
Three-month U.S. Treasury bills TMUBMUSD03M, +0.10% were yielding 2.44% on April 5, while the yield for 10-year Treasury notes TMUBMUSD10Y, -0.57% was only 2.5%. So banks’ interest-rate spreads are obviously under pressure. But the change in the Fed’s policy could signal a cut in short-term interest rates, which show investors a path ahead to better profits for banks.
Estimate cuts
For the first quarter, KBW analyst Brian Kleinhanzl expects “loan growth to remain in line with the better-than-expected fourth-quarter growth rate,” while he also expects net interest margins to be “flat, on average,” and for investment-banking and trading volume to be down from a year earlier, because “the government shutdown weighed on industry volumes,” he wrote in a report this month.
Adding investment banks Goldman Sachs GS, +0.08% and Morgan Stanley MS, +0.18% to Increase our list to the “big six” U.S. banks, here are consensus first-quarter earnings estimates, compared with what they were at the end of December, and to actual earnings for the fourth quarter and the first quarter of 2018:
Bank Ticker Consensus EPS estimate - Q1, 2019 Consensus EPS estimate - Q1 on Dec. 31, 2018 Estimate change EPS - Q4, 2018 EPS - Q1, 2018 J.P. Morgan Chase & Co. JPM, +0.32% $2.35 $2.58 -$0.22 $1.98 $2.37 Bank of America Corp. BAC, +0.31% $0.66 $0.68 -$0.02 $0.70 $0.62 Citigroup Inc. C, +0.79% $1.80 $1.87 -$0.07 $1.64 $1.68 Wells Fargo & Co. WFC, +0.21% $1.12 $1.16 -$0.04 $1.21 $0.96 Goldman Sachs Group Inc. GS, +0.08% $4.96 $6.55 -$1.59 $6.04 $6.95 Morgan Stanley MS, +0.18% $1.18 $1.46 -$0.28 $0.80 $1.45 Source: FactSet
Sequentially, all six are expected to post earnings declines, but there is a tendency for large-cap companies to beat quarterly earnings estimates — especially when they are lowered heading into earnings season. Year-over-year, half are expected to show better bottom lines.
Where’s the love?
Here are percentages of “buy” or equivalent ratings among analysts polled by FactSet, along with price targets and dividend yields for the big six:
Bank Ticker Share 'buy' ratings Closing price - April 5 Consensus price target Implied 12-month upside potential Dividend yield - current J.P. Morgan Chase & Co. JPM, +0.32% 47% $105.31 $114.94 9% 3.04% Bank of America Corp. BAC, +0.31% 57% $29.08 $32.69 12% 2.06% Citigroup Inc. C, +0.79% 79% $65.55 $76.54 17% 2.75% Wells Fargo & Co. WFC, +0.21% 45% $48.78 $56.83 16% 3.69% Goldman Sachs Group Inc. GS, +0.08% 43% $202.38 $230.70 14% 1.58% Morgan Stanley MS, +0.18% 72% $44.90 $51.86 16% 2.67% Source: FactSet
Citigroup C, +0.79% has the highest percentage of “buy” or equivalent ratings among the sell-side analysts.
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