This week, some of the companies hardest hit by the pandemic reported their third-quarter revenues. Investors who have some dry powder wait for quarterly figures before making a purchase as these reports provide insight into the future and whether the worst is over.
We have analyzed the earnings of some of the top US banks to understand if now is the right time to take advantage of their stocks that have been trading at their lowest levels for the past 10 years.
Loan Loss Provisions Are Flattening
One of the most important numbers that investors look at when analyzing bank profits in times of economic distress, such as the current global health crisis , are their loan loss provisions. This number tells us how much of their loan advances could default if their customers – individual borrowers as well as large corporations – go through economic pain during a recession.
The latest reports clearly show that credit losses are stabilizing and that the worst is probably over.
JPMorgan (NYSE :), the country's largest bank, set aside just $ 611 million for possible future credit losses, far less than expected and well below the $ 10.47 billion it recorded in the second quarter. The lender has doubled from the second quarter.
Bank of America (NYSE :), the country's second largest bank, also set aside a much smaller amount for commissions. In the, Bank of America set aside $ 1.39 billion. That was much smaller than the previous provision of $ 5.12 billion in the second quarter and $ 4.76 billion in the first quarter.
Bank of America CEO Brian Moynihan said during a telephone conversation with analysts Wednesday morning:
"We see a return to the fundamentals of a generally healthy underlying economy, but we will not get there until we fully address the healthcare crisis and its effects."
Provisions for the expected bad loans also fell to less than half at Wells Fargo (NYSE :), one of the worst performing banks. Despite the slowing provisions, the lender still has a 56% drop in profit. companies are in a much better position to weather the storm. While their net interest income is declining due to near-zero interest rates, their income from trading and investment banking is increasing.
Goldman Sachs (NYSE 🙂 surprised investors yesterday by saying that profits had nearly doubled, aided by trading activity, which accelerated this year as investors rushed to rebalance their portfolios with a prolonged period of low interest rates and raised models.
Goldman's trading revenues were up 29% from a year ago, and fees for underwriting corporate shares and bonds were up 60%. The bank's own portfolio of investments increased along with the stock market. Trading revenues were up 30% at JPMorgan and 17% at Citigroup (NYSE :).
Goldman Sachs 1-Year Chart.
"The markets continue to benefit from unprecedented monetary and fiscal support from central banks and governments worldwide," Goldman chief David Solomon said Wednesday.
Despite these bright spots, investor interest in owning bank stocks remains low. JPM and Bank of America stocks, for example, are down nearly 30% this year and are underperforming the.
JP Morgan Chase 1 Year Review.
But that weakness, we believe, presents a good opportunity for long-term investors to selectively buy stronger names.
Bank of America 1-Year Chart.
According to analysis in the Wall Street Journal:
“In contrast to the crisis of 2008, when over-indebted banks faltered and customers withdrew their money, today's lenders look safe for now – a sign that the regulations introduced after the latest crash have served their purpose . "
Their capital ratios, a closely monitored measure of fitness, have all remained stable or increased since late last year, the report said.
Bottom Line
Goldman, JPM and BAC are our favorite stocks in this industry because of their strong balance sheets and diversified portfolios. Their stocks are unlikely to gain strength in the near term as the pandemic continues to rage and the US elections just around the corner. But once these uncertainties are out of the way, we see these stocks regaining their lost ground, potentially offering tremendous benefit to long-term investors.
