There is a ton of news going on right now related to the novel coronavirus. In fact, we’re setting all sorts of unfortunate records as far as the economy and unemployment numbers go. It’s easy for other things to get lost in the shuffle. So you may not have noticed, but earnings season is upon us again. And, as per usual, the big banks will be some of the first major companies to report earnings for Q1. A bunch of heavyweight banks have reported or are about to report their results this week, including most of the nation’s too-big-to-fail institutions.
Before getting into the details, let’s step back for a second. Just what should you look for in a bank’s earnings report? InvestorPlace spoke with Dr. Ryan Garvey, the Donahue chair in investment management, and professor of finance at Duquesne University, who told us that a bank’s earnings:
“Depend on the bank and the varying types of services that they offer. More traditionally, though, bank earnings are driven by the extent of their deposit and loan activity, and the difference between the rate at which they borrow money and the rate at which they lend money.”
Last month, the Federal Reserve slashed interest rates by 100 basis points, the equivalent of four rate cuts, in response to the coronavirus’ economic impact. That huge rate cut, in turn, is creating major changes in both the rates that banks can borrow and lend money. All this volatility will create a memorable bank earnings season, and plenty of trading opportunities over the next week or two.
Key bank stocks to watch this earnings season include:
- JPMorgan Chase (NYSE:JPM)
- Bank of America (NYSE:BAC)
- Goldman Sachs (NYSE:GS)
- M&T Bank (NYSE:MTB)
- BOK Financial (NASDAQ:BOKF)
- Bank OZK (NASDAQ:OZK)
- First Republic Bank (NYSE:FRC)
Investors have tons of specific questions for the banking sector right now. How bad are things looking on the small business front? What portion of homeowners need mortgage forbearance? How much should be expecting in the way of loan loss provisions? How are the banks handling the implementation of the CARES Act small business loan relief program? And there’s plenty more. This will be one of the most important earnings seasons for bank stocks in decades.
Bank Stocks to Watch: JPMorgan Chase (JPM)
JPMorgan Chase is arguably the best-run big bank in the United States. Sure, it has had its missteps, such as the London Whale trading loss. However, JPMorgan Chase steered through the financial crisis in flying colors and has continued its winning ways since then.
With CEO Jamie Dimon capably running things, JPMorgan has been one of the most consistently profitable and efficient banking franchises in the country.
It has also managed a rare feat: both its investment bank and its retail banking business have been running well. This makes JPMorgan a main attraction this earnings season. The bank’s earnings report will serve as a bellwether for how the country’s financial system in holding up in the wake of the crisis.
Bank of America (BAC)
If you watch JP Morgan because it’s one the best national banks, it’s worth watching one from the other end of the spectrum as well. Therefore, you should keep an eye on BAC stock.
Investors tend to view Bank of America as one of the lower-quality national banks. Its valuation ratios, such as price-to-book and price-to-earnings have generally stayed depressed as a result as well.
Thus, it will be important to see how Bank of America is managing to fare as the coronavirus crisis starts to impact earnings. Will the bank’s improved operations be enough to change its reputation during this storm? Or will the bank head back toward the bottom of the pack again, as it was during and immediately after the financial crisis?
BOK Financial (BOKF)
One of the reason regional banks are interesting is because they tend to be more focused in one or two key lending areas. As such, they serve as a proverbial canary in the coal mine for a sector of the economy as a whole. If they fare well, it’s a good sign for the industry as a whole. But if they plummet, look out.
Energy banking is one such key sector. The national banks have some exposure to energy directly through loans to the sector, along with some additional interest thanks to things such as the housing and office markets in, say, Houston where the economy runs on oil.
However, big banks like Citigroup and JP Morgan generally had 2-3% of their loan book in energy as of the end of 2019. BOK Financial, aka The Bank of Oklahoma, by contrast, had a stunning 18% of its loan book in energy at the end of 2019, according to Morgan Stanley research. This is a worrisome number. Remember that your average bank is levered somewhere around 8-10x nowadays. Thus, theoretically, having 10% of your loan book fail would wipe out your equity and stock price entirely. BOK Financial has a simply huge energy exposure and thus even a moderate number of energy write-offs could cripple the bank.
Then there’s the virus to worry about as well. The Oklahoma economy, hit by a both collapsing energy prices and the virus could see housing and commercial properties struggle as well, putting further pressure on the bank. BOK Financial is a well-regarded bank, and shares are only down 50%. Other energy banks, like Cadence Bancorporation (NYSE:CADE) have dropped 75% already. Still, on a weak earnings report, BOK stock could get annihilated.
Goldman Sachs (GS)
Goldman Sachs is not a well-loved bank. Its critics sometimes refer to it as the “Vampire Squid” and the Occupy Wall Street protest movement made Goldman a vocal point of its complaints.
That’s understandable. Goldman Sachs, as an investment bank with a relatively modest consumer business, has always made money from navigating the markets well. That skill tends to end up drawing rebuke during economic busts, such as the Financial Crisis, when Goldman profited from plunging housing prices.
That’s what makes GS stock so interesting. How have they handled this latest outbreak of economic turmoil? Will they manage to capitalize on the situation as deftly as they have in past crises?
At $180 per share, Goldman Sachs is selling for a significant discount to tangible book value of $210 per share. A 15% discount to tangible book value is a great deal. Normally, quality banks trade for more than tangible book value. As a reminder, tangible book value is what you’d get if you sold off all a bank’s assets, paid off its liabilities and distributed the remainder to shareholders.
Over the past twenty years, Goldman has grown tangible book value four-fold, and it kept rising, even during the Financial Crisis. Goldman shareholders should make a fortune from this starting price on just about any economic outcome short of full-on economic depression.
M&T Bank (MTB)
There’s far more to American banks than just the too-big-to-fail mega-franchises. You have hundreds of regional banks, and thousands of even smaller community banks. The regional banks are especially interesting, as they are large enough to be power players within a state or group of states and enjoy strong brands and economies of scale.
But they also tend to stick to traditional banking, rather than getting involved in the sorts of casino capitalism bets that brought down the big banks in 2008.
InvestorPlace received this explanation on the challenges facing regional banks from Kevin Crowley, Emory University Senior Lecturer of Finance in the Goizueta School of Business:
“Most regional banks are focused almost exclusively on commercial and consumer banking. Moreover, with their limited scale, the regional banks have a hard time keeping up with the information technology and fin tech innovations. At present, all banks, regional and major, are suddenly feeling increased pressure of lower rates and a possible slowdown in the global economy due to the threat of a coronavirus pandemic. If the negative scenario plays out, we will quickly see how well these institutions have managed risk. The outlook for regional and major banks is less attractive today than it was at the beginning of the year. But the same can be said for nearly every industry.”
And why focus on M&T Bank in particular? It’s the second-largest regional bank in the country, as measured by the KRE Regional Bank ETF (NYSEARCA:KRE). We’ll get to the top one in a minute and it has a distinctive business strategy. However, if you’re looking for a barometer of how a typical well-run regional bank is doing, M&T bank is a great choice.
OZK Bank (OZK)
OZK Bank is another fascinating regional bank. The bank used to be called by its more colorful name, the Bank of the Ozarks. However, it rebranded as its ambitions grew to being a national player; in fact, it has been one of the country’s fastest-growing construction lenders. Construction, it’s worth noting, is one of the riskiest sectors of bank lending.
The bank has attracted many skeptics and short sellers. The bears claim that the little bank from Arkansas has gotten in over its head. Bank OZK has become a big player in markets like Miami that risk falling into a major slump. The largest national banks had pulled back on lending activity in markets like Miami and OZK stepped into the void. Will they get stuck with massive losses as construction activity dwindles in coming quarters?
As if that weren’t intriguing enough, OZK may have another mess on its hands. That’s because the company has a huge lending business against recreational vehicles (RVs). According to Nate Tobik, author of the Bank Investor’s Handbook, RV campgrounds are closed and RV owners are talking about selling their units at “firesale prices.” Needless to say, it’s not good for a bank lender if the collateral in question is getting dumped for big losses.
Bank OZK lent aggressively and earned fat profits during the boom years. But shares have lost 70% of their value in recent years. They could be in risk of even more downside depending on how their next earnings report looks. A dividend cut wouldn’t be off the table either if results are underwhelming.
First Republic Bank (FRC)
First Republic Bank has been one of the nation’s most successful and fastest-growing banks in recent years. Merrill Lynch (and subsequently Bank of America) owned First Republic during the financial crisis. But they unloaded it in 2010 via an initial public offering to raise funds.
Since that initial public offering, FRC stock has shot up from the $20’s to as high as $120. The bank has successfully focused on high net worth individuals in major metro areas such as San Francisco, New York and Boston.
Given the shape of the economic recovery since 2009, that was the right place to be. First Republic has been rolling in profits over the past decade. Booms in Silicon Valley, biotech stocks and other such fields showered prosperity on key First Republic client groups. It has been a virtuous cycle, and investors have rewarded First Republic with a huge valuation. It was one of the most expensive large banking stocks on a price-to-book basis in recent years. Additionally, the market capitalization had topped $20 billion last year, making it a power player on the national scene.
However, the upward cycle may break down now. First Republic was able to use its lofty stock price to help fuel its growth. Issuing stock at a major premium to book value helped First Republic raise needed capital to fund more loans. Those loans, in turn kept up its hyper-aggressive loan and EPS growth rates. With FRC stock down by a third in recent weeks, it will be fascinating to see how management adjusts its outlook and growth strategy with the next quarterly earnings release.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned GS stock.