Patience is running thin for America’s biggest bank stocks, and it probably couldn’t come at a worse time. Both heralded and despised for their role in the 2008 global financial crisis and the ensuing economic recession, so-called “too big to fail” bank stocks are broadly suffering their worst performance in the markets in recent memory.
Despite a measured vote of confidence by U.S. Federal Reserve Chair Janet Yellen, prominent contrarian voices are pushing for greater oversight. Adding to the pressure for bank stocks are weak macroeconomic indicators, which lessens the need for overly large financial institutions.
At issue are the growing cries by both industry experts and the general public to avoid another cataclysmic disaster. The Basel Committee on Banking Supervision led by example by requiring higher capital ratios — the balance between capital assets and risk from financial markets — of the 30 largest international banks.
The committee is also seeking further regulations that help prevent global bank stocks from overextending themselves to market risk.
That really is the heart of too big to fail. In the 2008 crisis, the biggest bank stocks had their hands all over international markets — to allow them to collapse would potentially cripple global commerce.
Ironically, proponents of increased banking oversight point out that this offer of a fail-safe by the government eliminates the incentive for internal risk management. Not only are externally imposed regulations necessary, they argue, more drastic measures — such as the split up of Big Four bank stocks — may be in order.
Similar sentiments have been articulated by Minneapolis Fed president Neel Kashkari. On a more symbolic scale, Bernie Sanders — the ever-popular renegade candidate for the Democratic party — has put bank stocks and Wall Street broadly in his crosshairs. Not to be outdone, big bank proponents have argued that these institutions were a source of stability when things went awry. In addition, their vast financial leverage is necessary for domestic and global economies to operate.
That’s certainly a valid point. However, big bank stocks are facing scrutiny at a very unfortunate time. Few international markets are experiencing growth, with key indices such as the Dow Jones Shanghai Index, the Nikkei 225 and the DAX Performance Index down sharply for the year.
While leading bank stocks may be in a position to help businesses, there’s simply not much business to be conducted.
The Big Four will be releasing their earnings results starting on Wednesday. Yet again, the timing is unfortunate as this earnings season is regarded as one of the more anxiety-ridden in years. Here is what you need to know for America’s top bank stocks.
Big Four Bank Stocks — JPMorgan Chase & Co. (JPM)
The ever-outspoken Jamie Dimon, chief executive officer of JPMorgan Chase & Co. (JPM), could easily have a second career as a politician. You can almost see the carefully crafted — read: fake — smile of Ted Cruz as Mr. Dimon implored both big and small banks to “work together” in light of the increased scrutiny of the financial industry.
Unfortunately for JPM, the small banks aren’t buying it. They see this as a political diversion. An even bigger challenge lies ahead when JPM releases its first-quarter fiscal-year 2016 earnings results — can Dimon and company deliver the goods?
Analysts expect JPM earnings to hit $1.26 per share to start off the year, which is 14 cents below the year-ago estimate. The reduced target stems from forecasts that calls for JPM to report revenue of $23.4 billion, or a nearly 6% reduction against Q1 of last year.
This coincides with a generally disappointing performance in annual revenue. Since FY2010, average annual sales growth measures -1%.
It goes without saying that Wall Street needs a compelling argument to keep the faith. Year-to-date, JPM stock is down nearly 12%. Sure, you could say it’s the best in the markets among the major bank stocks. At the same time, that’s a facile position for a company the stature of JPM. If JPMorgan can’t come through with a resounding success, I’d pay very careful attention to the downward trend channel that has been in place since mid-July of last year.
The way things are looking for JPM stock, Mr. Dimon may want to consider that second career option.
Big Four Bank Stocks — Bank of America Corporation (BAC)
The price is right for Bank of America Corporation (BAC), says one of the world’s most premiere investors, Warren Buffett. A reshuffled organization, attractive valuations and increased stability against capital risk are the primary reasons for being bullish on BAC.
It also doesn’t hurt to hold options at nearly half the present market value of BAC.
Frankly, any investment with that kind of cushion would be considered a good investment. The real question here is whether BAC is priced right today. That might be answered this Thursday when BAC releases their financial results.
Due to the effects of global market volatility and overall low interest rates, Wall Street has downgraded its expectations for Q1. Consensus estimates peg BAC to hit an earnings-per-share of 21 cents, down 8 cents from Q1 of last year.
Coincidentally, BAC missed the year ago quarter, and they risk repeating in FY2016. Total revenue performance has been poor over the past six years, with FY2013 providing the only glimmer of hope.
As for BAC stock’s showing in the markets, it has essentially been a race to the bottom among the Big Four bank stocks. To the chagrin of Bank of America’s shareholders, BAC is winning that race, albeit by a slim margin. On a YTD basis, BAC is down 23%.
The only positive here is that against its low for the year, BAC is up 15%. However, that’s a mere technicality. Overall, shares have had trouble gaining traction in a very troubled market. Like other bank stocks, I’m worried about the descending trend channel from last summer.
Could BAC beat its earnings consensus? Anything is possible. The problem with BAC is that it needs to do well. That’s a risk that may be too hot for most investors to handle.
Big Four Bank Stocks — Citigroup Inc (C)
Citigroup Inc (C) has a bold new plan — they don’t make money until you make money!
While this sounds very much like a bad infomercial, I suppose we should give some credit to Citigroup for trying to do something tangible. In a recent regulatory submittal, the bank will limit executive bonus compensation if C stock returns fall over a three-year period.
The sentiment is well appreciated but the timing couldn’t be more bizarre.
With a YTD loss exceeding 20%, C stock is simply one of the worst among major bank stocks. It did have a nice-sized pop from its February bottom; however, this seems more like a desperation rally than anything else.
Unlike the rise of JPM — which was relatively controlled over the past four years — C stock jumped between the summer of 2012 and the winter of 2013. But since then, C shareholders have seen their investment go sideways. This year’s volatility shattered that horizontal trend, which typically is a bearish omen.
And if you thought the fundamentals would provide a respite from C stock’s troubles, think again! While the other bank stocks are keeping their cards close to their chest, Citigroup warned Wall Street that they expect to absorb double-digit-percentage losses in Q1 through their trading and investment activities.
To further the pessimism, C stock will be hit with a $400 million restructuring charge. With obstacles like that, it’s hard to see Citigroup moving anywhere but down when it releases results this Friday.
Some consider C stock to be a wild card. If the bank pares expected losses, it could benefit from a reactionary spike. Unfortunately, from both a technical and fundamental perspective, C stock would simply be a wild gamble.
Big Four Bank Stocks — Wells Fargo & Co (WFC)
One of the brighter names among bank stocks just dropped an ill-timed public relations bomb. Wells Fargo & Co (WFC) settled a lawsuit with the U.S. Department of Justice to a record $1.2 billion, with WFC conceding that they deceived the government for the purpose of insuring risk-laced mortgages.
In a damning confession, WFC falsely certified several home loans as being qualified for Federal Housing Administration insurance. Sources close to the case characterized the DOJ victory as an end to “reckless underwriting.”
It may also mark the beginning of the end of too-big-to-fail bank stocks. Presidential candidates across the political spectrum have already voiced criticism of the Wall Street aristocracy. It completely contradicts JPM chief Jamie Dimon’s message of the positive role of big banks.
While the announcement won’t likely cripple WFC — the biggest mortgage lender in the U.S. — it’s not the news you want heading into your Q1 earnings release.
However, not all hope is lost. Thanks to a dominant presence in major cities across America, net interest income in FY2015 gained 4% over the prior year’s result. This is a substantial difference from the other bank stocks, which have seen declines. Thus, Wall Street is fairly optimistic, forecasting WFC to hit an EPS target of 98 cents — the same estimate from the year-ago quarter.
WFC has the best chance out of the Big Four to do well this earnings season. The risk is, however, that it may not matter too much if the rest of the sector goes up in smoke.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
