How the US megabanks could set the tone for results season (on both sides of the Atlantic)

“The fourth-quarter reporting season kicks off in earnest on Friday when the megabanks JP Morgan Chase, Citigroup and Wells Fargo all release their earnings and these figures could set the tone for both the FTSE 100 banks (who report in February) and stock markets more widely,” says AJ Bell Investment Director Russ Mould.

“The Big Four US banks are expected to report record earnings for 2021 but analysts then expect a dip in 2022, as a good portion of last year’s forecast uplift came from writing back bad loan provisions taken in 2020 rather than growth in loan books or higher net interest margins.

“The market is certainly looking for better things. The Philadelphia KBW Banks index in the USA is already up 10% this year (and is up by 37% over the past 12 months) while the FTSE All-Share Banks index can point to an 8% gain 2021 (and a 25% advance over the past year).

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Refinitiv data

“Analysts expect Bank of America (which reports on Tuesday 18th), Citigroup, JP Morgan Chase and Wells Fargo to report an aggregate net profit of $117 billion, almost double 2020’s $60 billion outcome and higher than 2019’s previous peak of $100 billion.

“Intriguingly, the Big Four US main street banks’ best year before the Great Financial Crisis was 2006 (just before the wheels began to fall off in 2007) when they made net profits of $66 billion between them. They blew past that in 2015, exceeded it again in 2016, 2018 and 2019 and look destined to beat that peak in 2021.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“This is in marked contrast to the Big Five in the FTSE 100 who, according to analysts’ forecasts – might just have scraped past their 2007 peak profit of £35.8 billion in 2021, when they are estimated to have racked pre-tax earnings of £36.4 billion.

“We will learn more when they release fourth-quarter and full-year results next month. Standard Chartered is first up on 17th February, followed by NatWest on the 18th, Barclays and HSBC on the 23rd and finally Lloyds on the 24th.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“There may be several key reasons for the difference in earnings power, but the US banks may have been more aggressive in their loan provisioning and cleaning up the mess of 2007-09. In addition, the US Federal Reserve pays interest on banks reserves’; three of the US Big Four have powerful investment banks which can feast upon booming equity and bond markets and ride the wave of IPOs, SPAC deals and merger and acquisition activity; and the US economy has simply been more dynamic than that of the UK or many of the emerging markets addressed by HSBC and Standard Chartered.

“Whatever the reasons, both the Big Four in the US and the Big Five are expected to show a dip in profits in 2022, as this year is not expected to benefit from the write-back of bad loan provisions taken in 2020. Not as many loans went sour as expected in 2021, helped by vaccinations, an end to lockdowns and an economic upturn.

“The Big Four have already written back $19 billion in loan loss provisions in the first three quarters of 2021, against the $60 billion in charges they took in 2020. The pace slowed in the third quarter to $3.7 billion of write-backs, from $6.2 billion in the second and $9.7 billion in the first, and it will be interesting to see if it did so again in the fourth.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts. *JP Morgan figure for 2009 excludes $8.9 billion in other write-downs. *2021 to date, first three quarters only.

“Analysts and shareholders will look to other key drivers of profit beyond loan loss provisions or writebacks) and the investment banks (with the exception of Wells Fargo).

“Loan growth remains anaemic and is still being outstripped by deposit growth. This may signal caution on behalf of consumers and corporations, in light of the latest viral variant, but also the benefit of Government support schemes which are now ending or have ended. An acceleration in loan growth would speak of increased confidence in the US economy and give support to earnings forecasts.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts

“Analysts and investors will also look to the net interest margins of the US Big Four (with a possible readthrough to the Big Five in the UK). A decade of zero interest rate policies and Quantitative Easing has done these no end of harm, on both sides of the Atlantic. Markets now expect three interest rate rises from the Fed in 2021, and the central bank is even discussing Quantitative Tightening. Higher rates and a steeper yield curve could boost net interest margins and earnings power – providing higher borrowing costs and interest bills do not tip borrowers (or the economy) over the edge.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts

“The final point of attention for the US megabanks will be dividends and share buybacks. Wells Fargo has cut its overall dividend in 2021, thanks as much to regulatory woes and economic and loan-book related ones, but the other three have not (and even Wells Fargo managed an increase to $0.20 a share from $0.10 in the third quarter).

“Dividends will not reach the $30 billion to $31 billion aggregate peaks of 2007 and 2019 but are still expected to reach a very healthy $24 billion in 2021, ahead of further increases.

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“For 2023, analysts think the US banks’ pay-outs will return to their former highs and that is with buybacks on top. In the first nine months of 2021, the US Big Four bought back $49 billion of stock, more than any full year this century bar 2018 ($75 billion) and 2019 ($94 billion).

How the US megabanks could set the tone for results season (on both sides of the Atlantic)

Source: Company accounts. *2021 to date, first three quarters only

“This boosts the total cash yield on offer from the US banks, coupled with their lofty profitability and high returns on equity, may explain why three of the four of them trade at premiums to net asset value, unlike the FTSE 100 banks, all of which trade at a discount.”

     
  2022E
P/E
Q3 2021
Price/book
2022E
Dividend yield
2022E
Dividend cover
Q3
2021
RoTE
Q3
2021
CET 1 ratio
Q3 2021
Leverage ratio
Citigroup 8.3 x 0.83 x 3.2% 3.72 x 9.5% 11.7% 5.8%
Wells Fargo 14.6 x 1.54 x 1.8% 3.90 x 12.4% 11.8% 7.9%
Bank of America 15.5 x 2.27 x 1.8% 3.56 x 15.9% 11.1% 6.6%
JP Morgan 13.9 x 2.39 x 2.5% 2.89 x 29.0% 13.1% 6.7%

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

  2022E
P/E
Q3 2021
Price/book
2022E
Dividend yield
2022E
Dividend cover
Q3 2021
2021
RoTE
Q3 2021
2021
CET 1 ratio
Leverage ratio
Standard Chartered 7.8 x 0.53 x 3.2% 4.00 x 6.4% 14.6% 5.1%
Barclays 8.1 x 0.73 x 3.8% 3.25 x 11.9% 15.4% 5.1%
HBSC 14.5 x 0.85 x 4.3% 1.61 x 8.7% 15.9% 5.2%
NatWest Group 12.4 x 0.93 x 4.0% 2.00 x 8.5% 18.7% 5.9%
Lloyds 8.8 x 0.94 x 4.2% 2.67 x 14.5% 17.2% 5.8%

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

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