Low interest rates and tougher government regulation have depressed analysts' expectations for the banking sector this year, but Citigroup (C) was able to beat Wall Street with its second-quarter performance.
Banking stocks were in focus Friday with the earnings releases of Citi and Wells Fargo (WFC) , among others, before the opening bell. Citi handily topped top- and bottom-line expectations, while Wells Fargo matched the Street's forecasts for the quarter.Citi a key holding of the Action Alerts PLUS portfolio, reported earnings per share of $1.24 on revenue of $17.6 billion vs. consensus estimates of EPS of $1.10 on revenue of $17.4 billion. Citi was able to show resilience amid tough global headwinds as the company's expense management improved its operational leverage, according to AAP co-managers Jim Cramer and Jack Mohr.
"The bank's concerted efforts to strategically overhaul its legacy business -- which had been plagued by regulatory scrutiny, complexity, toxic assets (held within Citi Holdings, otherwise known as its "bad bank"), bloated expenses, trading pressures, and poor returns on capital -- has proven successful as the bank is emerging as a lean, clean, operating machine," Cramer and Mohr wrote in a note to subscribers today. "From a structural perspective, Citi is simpler, smaller, safer and stronger institution, boasting substantial liquidity along with high-quality capital
Citi experienced modest gains in trading Friday morning following the earning release, lending credence to Cramer and Mohr's assertion that the stock is currently undervalued.
"On valuation, Citi increased its tangible book value (TBV) to $63.53. To recall, TBV is the value of an organizations liquid assets, or what the company would be worth in the open market if it was forced to liquidate today," Cramer and Mohr wrote. "With shares of Citi trading at a 30%+ discount to TBV, and in light of this morning's strong results, we consider to view the stock as undervalued yet would await a pullback below $42 before adding to the position as we expect a better entry point to emerge."
Fellow AAP holding Wells Fargo did not fare as well in the most recent quarter and the market reacted accordingly Friday, sending shares down nearly 2% during the morning session.
The bank reported in-line top- and bottom-line results with EPS of $1.01 on revenue that increased 4% year over year to $22.16 billion. Out of character for what has turned out to be the most stable bank since the end of the 2008 financial crisis, the bank was not able to overcome the same economic headwinds that Citi did in the most recent quarter.
"Compared to some of its large-cap peers who have already reported results, WFC's were less inspiring versus consensus estimates, putting pressure on its premium valuation," Cramer and Mohr said.
The bank's net interest margins (NIM) -- a key metric for evaluating banks -- fell to 2.86% from 2.89% last quarter and 2.9% in 2015. The drop, while not ideal, is understandable considering the persistent low interest rate environment, according to Mohr and Cramer. However, the bank was not bereft of positive indicators in the second quarter.
"Positively, the bank did increase its net interest income quarter over quarter, with the jump driven by impressive loan growth across the board, in addition to the benefits from the acquire GE Capital (GE) assets," Mohr and Cramer said. "Unfortunately, the continued low-yield environment means that the bank makes less money on the additional loans it has issued. Although NIM is likely to remain pressured in the near-to-medium term, WFC's loan and deposit growth are solid indicators for long-term value."
PNC Financial reported earnings of $1.82 per share, $0.07 better than analysts $1.75 consensus expectations. "We had a good second quarter against a backdrop of global uncertainty," CEO William Demchak said in a statement. "In the wake of the Brexit vote, as lower interest rates weigh on future performance, we remain focused on executing against our strategic priorities to create long-term shareholder value without compromising our risk profile or balance sheet."
U.S. Bancorp reported EPS of $0.83 on revenue of $5.45 billion, topping analysts' $0.80 on revenue of $5.19 billion expectations. The bank's revenue for the quarter was a record for the company.
"Despite ... economic headwinds we continued to effectively execute on our strategy to be the most trusted choice and to unify the customer experience," Davis said in a statement.
Rounding out the recent banking earnings releases, JPMorgan Chase (JPM) kicked off the second-quarter earnings season for the big banks Thursday when it released its latest results. The company reported EPS of $1.55 for the quarter. The total was a penny better than the bank reported last year and ahead of the $1.43 analyst were expecting this year. Revenue for the period rose to $25.21 billion from $24.53 billion last year.
Bank of America (BAC) is scheduled to report its latest earnings results before the opening bell on Monday. Wall Street is expecting the bank to report second quarter EPS of $0.33, a 27% decline from the same period last year. Revenue for the period is expected to decline 7% year over year to $20.39 billion, according to Bloomberg estimates.
Finally, Goldman Sachs (GS) is scheduled to report its quarterly results Tuesday. Analysts are expecting the bank to post earnings of $3.01 per share. During the previous quarter, Goldman Sachs reported an EPS of $2.68.