It’s no exaggeration to say that it’s crunch time for the big four” bank stocks. The whole industry has come under fire due to scandals disconcerting even against Wall Street standards. In addition, a politically tense environment combined with questions about economic stability have raised the stakes.
We are now inside 90 days until the end of 2016. Yet with all that time, only one of the big four bank stocks is in positive territory for the year. The broader banking industry as defined by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is up a modest 3% year-to-date.
Not only that, the XLF compares unfavorably to the benchmark exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY). The SPY is up 6% YTD, which is unsatisfactory compared to prior years’ results.
Shocking Scandal Afflicting Bank Stocks
But the biggest disappointment among the big four bank stocks is Wells Fargo & Co (NYSE:WFC). After WFC disclosed that they created over 2 million fake accounts to boost employees’ sales targets, shares tumbled hard. Since the scandal broke, WFC stock is down 9% after dropping as low as 12%. But don’t let this pretension optimism fool you. As InvestorPlace’s Louis Navellier notes, WFC was already struggling before the ugly and embarrassing incident came to light.
The worst part of the controversy is that it casts an extremely dark cloud over all bank stocks. Multiple faith-based investors and organizations have called for a deep-rooted investigation into Wells Fargo’s business practices. For them — and for all Americans — WFC committed a violation of the public trust. On a personal level, I’m aghast that I vouched for their superior ethics regarding refusal of predatory lending. In so many ways, what WFC did was much worse.
Therefore, it was safe to assume that Wells Fargo’s third quarter of fiscal year 2016 earnings report wouldn’t matter. And it didn’t — WFC beat its earnings per share target of $1.01 by two cents, boosted by its wealth management division. The problem is, WFC is toxic. Aside from a quick upside burst, shares fell on the news. Don’t expect a positive reversal for some time to come.
Competition Is Still Tight Within the Big Four
Wells’ troubles might be music to the ears of Bank of America Corp (NYSE:BAC). For several years, BAC was the caboose of the big four bank stocks. Now, it can gladly hand that dubious title to WFC.
However, I would caution against an overly aggressive approach toward BAC stock. For one, shares are still underwater for the year by 3%. Second, worries about a severe economic downturn — a concern forwarded by BAC, no less — has not only affected bank stocks, but several other sectors. But because the big four is the bellwether of the biggest economy in the world, the warning has enormous resonance.
One of the areas of concern for BAC stock is consistently declining net interest income, or income generated from the bank’s balance sheet. This can include customer deposits or its equity account. In Q2, net interest income fell 12% year-over-year. It was a similar problem for Citigroup Inc (NYSE:C), where the metric declined by 5% in Q2 against the year-ago level.
In an indirect way, the bearishness in net interest income tells us that there are fewer people taking advantage of big four banking. That’s not surprising given the low interest rate environment incentivizing spending.
But for both BAC and C stock, sales from lending and other business activities have also dropped. For C stock in particular, it saw an average 20% decline in non-interest income in Q1 and Q2. Therefore, we’re seeing the worst of both worlds.
Earnings wise, I would be cautious as to its implications. Citigroup redeemed itself in Q3, registering an EPS of $1.24, up 8% above consensus. Further, revenue was up over 2% to $17.76 billion from $17.34 billion.
But with the exception of an early morning rally that was subsequently negated in afternoon trading, the positive result did nothing for C stock. The fear is that BAC — which should also beat its estimates — isn’t good enough to overcome broad industry pessimism.
Can JPM Save Bank Stocks?
This finally brings us to JPMorgan Chase & Co. (NYSE:JPM). If any of the major bank stocks were to pull off a huge win, it should be JPM. After all, it’s the only bank among the big four that’s yielded a positive return for investors this year.
It did not disappoint. JPM put up record results, with fixed income revenue skyrocketing 48% against the year-ago level. Furthermore, sales from markets and investor services generated $6.5 billion, an increase of nearly 21%, while investment banking saw revenues rise 6% to $2.9 billion. Analysts noted that JPM benefitted from unusual tailwinds, such as the Brexit vote and a particularly active central bank ecosystem.
However, like the other reporting bank stocks, JPM didn’t inspire in the markets. At just 4% YTD, these are not the kind of numbers that will have Wall Street doing jumping jacks. According to a breakdown of JPM stock’s fundamental and technical strengths, it is very much a middling investment. This will only invigorate arguments that the big bank stocks should break up into smaller, publicly traded companies.
Hence, the dilemma facing the big four bank stocks. It’s not just a must-win: it’s a must-win big. Unfortunately, the result was mixed.
JPM proved itself by putting up huge numbers. Citigroup, on the other hand, gave a solid performance that just didn’t do anything for C stock. But WFC is the pink elephant in the room — its repugnant stench is turning off everybody from bank stocks, surely leading to much soul searching.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
