America’s “Big 6” Financials: Which Ones Make the Grade?

The “Big Six” bank stocks are having a fine earnings season thanks to a run of better-than-expected quarterly reports, but the results were far from perfect. From surprisingly large charges to even more interest-rate-related woes, even the best financials have plenty of challenges ahead.


For now, however, the market is rewarding the big banks, and that’s helping to lift financials in general. Indeed, since JPMorgan Chase (JPM) and Wells Fargo (WFC) kicked off earnings season a week ago, the Financial SPDR (XLF) — a proxy for the sector — is up 2%, beating the S&P 500 by nearly a full percentage point over the same short span.

And after Morgan Stanley’s (MS) surprisingly strong report Monday, bank stocks should maintain their momentum for at least a little while longer.

Farther out, however, the good news from the big financials is going to have to sustain the big bank stocks until the next earnings season, and that’s going to be a tougher task. As welcome as much of the second-quarter news was, some nasty surprises and further fundamental deterioration is going to be a headwind for bank stocks for the next three months.

That said, this was a good earnings season for the Big Six. JPM, WFC, MS, Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) delivered against expectations even as revenue growth was hard to generate.

And now that the reporting season is over (at least for the major financials), it’s time to take a look at the scorecard for Q2 results. From worst to first, here are the grades:

“Big Six” Financials Report Card: Goldman Sachs (GS)


Grade: C+

Goldman Sachs (GS) clobbered Wall Street estimates, but it spooked the market with a surprisingly large charge for legal costs.

The actual size of the charge wasn’t the issue so much as it was unexpectedly large. The cliche is true: The market hates uncertainty, so now investors have to worry about more nasty surprises lurking ahead.

Beyond that, Goldman had a pretty good quarter — just not as good as the market has come to expect. A victim of its own success, GS doesn’t only have to exceed expectations … it has to beat them by a lot.

The busy market for deals was good for GS, but the market wanted even more. Goldman Sachs also suffered a steeper drop in trading revenue from fixed income than rivals.

GS stock shouldn’t have much trouble overcoming the mixed report, but it will probably take something away from share performance over the next few months.

“Big Six” Financials Report Card: Wells Fargo (WFC)

"Big Six" Financials Report Card: Wells Fargo (WFC)Grade: B-

Wells Fargo (WFC) has been the least-troubled bank throughout the post-crisis period, but that doesn’t mean it’s trouble-free.

True, WFC arrested its slide after an especially worrisome Q1. But it didn’t exactly storm back from a prior quarter in which profits declined for the first time in more than four years.

Net interest margin — the difference between what a bank pays for deposits and charges for loans — continued to narrow. Additionally, WFC, the nation’s largest mortgage lender, suffered a decline in mortgage-banking revenue. It also absorbed a steeper drop in revenue than the Street had forecast.

There were bright spots, to be sure. Loans, deposits and capital all grew year-over-year, and earnings did match analysts’ average estimate. Still, this was a mixed report.

WFC stock is having a mediocre year of gains despite hitting an all-time high last month. After Q2 results, expect more mediocre gains ahead.

“Big Six” Financials Report Card: JPMorgan Chase (JPM)

"Big Six" Financials Report Card: JPMorgan Chase (JPM)

Grade: B

JPMorgan Chase (JPM) delivered a boring but better-than-expected second quarter, and that bodes well for JPM stock.

True, earnings only beat estimates because of cost cuts — but the market loves cost cuts. Getting smaller is the strategy du jour for financials.

Besides, it’s not like JPM has much choice. The top line shrunk, hurt by declines in revenue from mortgage banking and trading. Like the rest of the industry, net interest margin continues to be plagued by near-zero interest rates.

The bottom line is that JPMorgan is on the comeback trail after a dismal 2014 marked by hits from big legal costs, higher loan-loss reserves, weak trading revenue and yet more regulatory woes.

JPMorgan has now delivered two consecutive quarters where it looks stable, reasonably well-run and primed for better growth ahead. That should be enough for JPM stock to keep grinding out market-beating gains in the second half of the year.

“Big Six” Financials Report Card: Citigroup (C)

"Big Six" Financials Report Card: Citigroup (C)

Grade: B+

Citigroup (C) used to look like the gang that couldn’t shoot straight, but the latest results show that the firm’s turnaround is working. Indeed, Citi earnings hit their highest level since the financial crisis, lifting C stock to a six-year high.

Earnings surpassed analysts’ average forecast by a wide margin, while revenue topped projections by a hair.

The key to the better-than-expected results was an end to giant legal bills, as well as cost cuts. The drop in legal costs and savings from restructuring led to a 30% decline in operating expenses.

Now that it’s free from the burden of litigation expenses, Citigroup is set for easy year-over-year comparisons, and cost cuts are going to make operating margins look better.

At some point, the market should reward Citigroup’s progress with a little multiple expansion (which would lift Citi stock). In fact, it already has started — C shares are up 4.5% since earnings.

“Big Six” Financials Report Card: Bank of America (BAC)

"Big Six" Financials Report Card: Bank of America (BAC)

Grade: B+

Second-quarter results might very well be the turning point for Bank of America (BAC) stock. Now that the crushing weight of its legal and regulatory woes are largely behind it, cost cuts and easy year-ago comparisons allowed BAC to almost double its net income.

BofA easily topped the Street’s earnings guess largely thanks to a 95% drop in litigation expense and a slash-and-burn approach to other costs.

The top line was even more impressive. Banks like BAC are getting smaller on purpose. Revenue is supposed to fall under such circumstances, especially when business is as soft as it is. And yet BAC reported a surprise increase in revenue.

Bank of America stock is by no means a steal at current levels. It’s still walking with a noticeable limp. But its biggest problems are behind it and a turnaround is well underway.

Like Citigroup, BAC stock deserves some multiple expansion for its success so far.

“Big Six” Financials Report Card: Morgan Stanley (MS)

"Big Six" Financials Report Card: Morgan Stanley (MS)

Grade: A-

Morgan Stanley (MS) beat the Street’s profit and revenue estimates by a wide margin, but it was the way in which it did so that earns this bank the best Q2 grade.

MS is purposely moving away from trading — the undisputed redoubt of rival Goldman Sachs — to concentrate on boring-but-safe wealth management. Furthermore, soporific bond markets caused trading revenue at Goldman and other to fall last quarter.

And yet MS absolutely killed it with trading. Revenue from that business line rose 32% year-over-year to $3.5 billion. Goldman Sachs saw trading revenue decline 6% to $3.6 billion.

For one quarter at least. MS nearly toppled GS at its own game, but that’s not the only good news out of Q2. Wealth management posted a 5% rise in revenue and pre-tax income gained 16%.

Perhaps most importantly, MS’s latest results build on a very strong first-quarter performance. At this rate, MS stock will easily continue to outpace the broader market.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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