What Weighed on the Big Banks’ Profits In the First Quarter?

What Weighed on the Big Banks’ Profits In the First Quarter?

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The first-quarter announcement season is here! As usual, the Big Banks have started the season off, with 10 of the 14 financials reporting their latest quarterly results this week.

Analysts have been wary of the financial sector’s earnings growth given the Federal Reserve’s plans to raise key interest rates by 0.50% to fight inflation, as well as the war in Ukraine and the slower trading activity in general. I should add that loan losses are expected to weigh on the Big Banks’ earnings growth, too.

According to FactSet, the banking industry will likely see the largest year-over-year (YOY) earnings drop of the 11 sectors in the S&P 500, with earnings expected to decline 36%. Banks will also likely have the largest impact on the decline in earnings for the entire financials sector, which is anticipated to report the largest YOY earnings decline of all eleven sectors. If you strip out the Big Banks, the financial sector’s earnings are estimated to fall 16.5% instead of 25.7%.

Personally, I don’t think bank stocks represent good high-growth buys and wouldn’t recommend them right now. Long-time readers know that I’m an ex-banking analyst who worked for a division of the government that is now a part of the Federal Reserve. During my time there, I saw how they essentially “cook their books” and that scarred me for life.

Now, at the beginning of the month, I reviewed what analysts expected for the first-quarter earnings season. As you may recall, I noted that the Big Banks — JP Morgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC) and Bank of America (NYSE:BAC) — are forecast to report an earnings decline for their first quarters in fiscal year 2022. Three of these banks released their latest quarterly results, so, let’s use today’s Market360 to see how well they did.

JPMorgan Chase & Co. (JPM): First-Quarter Earnings Announced on Wednesday, April 13

JPMorgan posted earnings of $2.76 per share, down 40% from earnings of $4.59 per share a year ago. Analysts were calling for earnings of $2.69 per share, so JPM posted a 2.6% revenue surprise. Revenue of $30.7 billion topped analysts’ estimates for revenue of $30.59 billion. However, this is still down 5% from revenue of $32.3 billion reported in the same quarter of last year.

Net income fell 42% YOY to $8.3 billion. This was largely due to JPM’s net credit reserve of $902 million, versus a net credit reserve release of $5.2 billion a year ago.

“We remain optimistic on the economy, at least for the short term — consumer and business balance sheets, as well as consumer spending, remain at healthy levels — but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.” CEO Jamie Dimon said in a statement.

Citigroup Inc (C): First-Quarter Earnings Announced on Thursday, April 14

Citigroup beat analysts’ expectations on the top and bottom lines. For the first quarter, the bank reported earnings of $2.02 per share on revenue of $19.2 billion. The analyst community anticipated earnings of $1.55 per share on revenue of $18.2 billion, so Citigroup bested earnings estimates by a whopping 30.3% and revenue estimates by 5.5%.

However, it’s important to note that these results are down from a year ago. In its first quarter of fiscal year 2021, Citigroup posted earnings of $3.62 per share on revenue of $19.7 billion. So, earnings fell 44.2% YOY and revenue slipped 2.5% YOY.

In addition, net income of $4.3 billion fell 46% YOY. This was due to higher credit costs, an increase in expenses and weak revenues. Citigroup also reserved $1.9 billion for potential loan losses due to the Russia-Ukraine war, as it has a larger footprint in Russia than the other U.S. banks.

Wells Fargo & Co (WFC): First-Quarter Earnings Announced on Thursday, April 14

Wells Fargo posted mixed earnings for its first quarter in fiscal year 2022. Earnings of 88 cents per share beat analyst estimates of  80 cents per share by 10%. The decrease of $1.1 billion for allowance in credit losses added 21 cents per share. However, this is still a 14.6% year-over-year decrease from earnings of $1.02 per share for the same quarter a year prior.

Revenue slipped 5.1% year-over-year to $17.59 billion. Analysts expected $17.8 billion in revenue, so the company posted a 1.2% miss. The decline in revenue was due to weak revenue in its consumer banking and lending business, corporate and investment banking and corporate business. Net income of $3.67 billion slipped nearly 21% year-over-year from net income of $4.63 billion in the same quarter of last year.

Interestingly, Wells Fargo should benefit from the Fed’s key interest rate hikes, as the higher rates could increase the bank’s interest income. Its commercial banking business rose 12% from the same quarter of last year.

The truth of the matter is these Big Banks’ fundamentals are far from superior. Folks using my Portfolio Grader tool who are interested in fundamentals would have known to stay far away from these stocks well before earnings. As you can see in the Report Card below, all but Wells Fargo hold low marks in Portfolio Grader.

The reality is that since the start of the year, Citigroup, JPMorgan and Wells Fargo have been on the decline. And while Citigroup shares did rally in the wake of its better-than-expected earnings report, it’s important to note that the stock fell to a 52-week intraday low just last week. In addition, Thursday’s pop comes on low volume. So, I’m not very impressed by the shares’ post-earnings jump.

Now, Bank of America will report its earnings for its first quarter in fiscal year 2022 next Monday, April 18. Analysts expect earnings to decline 14% year-over-year to 74 cents per share, down from earnings of 86 cents per share in the same quarter of last year. Revenue is expected to rise 0.8% year-over-year to $23.11 billion.

While the Fed’s move to lift interest rates should bode well for the banks’ income in the near term, the reality is banks are not good growth investments in the current yield curve environment because an inverted yield curve weighs on the banks’ profits.

So, I like to focus on high-growth, high-quality stocks that have historically prospered in a rising interest rate environment, and financials simply don’t fit that bill.

The bottom line: If you want to have a successful high-growth portfolio, these bank stocks should not be on your buy list.

So, rather than invest in the financials right now, I recommend “inflation proofing” your portfolio by adding fundamentally superior stocks that are profiting from rising energy prices and higher interest rates.

In Growth Investor , we’ve already taken steps to align our Buy Lists to profit in the new environment. In my Growth Investor Monthly Issue for April, I added nine exciting new stocks benefiting from rising prices for natural gas, crude oil and building materials.

As a result, my Growth Investor stocks will now be characterized by 51.4% average annual sales growth and 370.9% average annual earnings growth. This is well ahead of the S&P 500’s earnings growth rate of 4.5% and revenue growth rate of 10.7%. Simply put, my earnings are accelerating while the market’s earnings are decelerating.

So, if you want to prosper in the current environment, stay away of the Big Banks and invest in fundamentally superior high-growth companies instead. If you’re not sure where to start, join me at Growth Investor today and you’ll have full access to my latest buys, Top Stocks lists, as well as my High-Growth Investment and Elite Dividend Payers Buy Lists. I am confident that these are the stocks that will emerge as the market leaders deliver strong profits to investors.

Click here to get started today.

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