Thursday morning. The third quarter earnings release docket included Bank of America (BAC) , Citigroup (C) , Morgan Stanley (MS) , US Bancorp (USB) , and Wells Fargo (WFC) .
Top and bottom line beats were standard on Thursday, just as they were on Wednesday for JPMorgan Chase (JPM) . As with JPMorgan, the outright numerical performance of these beats was enhanced through the release of excess reserves that had been set aside as security against expected pandemic induced loan losses that thankfully never materialized. And as with JPMorgan, while these reserves are real profits that were never recognized, they also serve to, in a way, (maybe I'm just crazy) to dilute the quality of these sizable beats for the quarter reported.
Not every bank made use of these releases to the same degree. Let's take a look at a couple of these big banks and see where to go from here.
Wells Fargo
Wells Fargo reported GAAP EPS of $1.17, beating Wall Street by about $0.17, on revenue of $18.83 billion. Though the revenue number amounted to a year over year contraction of 2.4%, this result did beat expectations.
Revenue by segment...
- Consumer Banking and Lending... produced revenue of $8.804 billion, -4% y/y, as weakness in home and personal lending was partially offset by growth in Credit Card and Auto. The unit did produce net income growth of 181% to $2.451 billion on greatly reduced non-interest expenses and a huge reduction in provisions for credit losses.
- Commercial Banking... saw revenue decrease 7% to $2.076 billion, mostly on reduced asset based lending and leasing. Net income popped an astounding 295% to $759 million, driven by again... a reduction in non-interest expenses and a huge reduction in provisions for credit losses.
- Corporate and Investment Banking... actually experienced revenue growth of 2% to $3.385 billion, as investment banking revenue soared 24% and lending increased 19%. This was offset by negative year over year contributions from Treasury management, Fixed Income and Equities. Net income for the unit increased quite significantly (+41%) to $1.53 billion, on the same two impacts seen above, reduced non-interest expenses and decreased provisions for credit losses.
- Wealth and Investment Management... contributed 10% revenue growth to $3.618 billion, entirely on non-interest income. Net income grew 38% to $579 million, despite increased non-interest expenses.
Overall, Wells Fargo included decreased provisions for credit losses adding up to $1.7 billion or $0.30 per share. The firm also took a $250 million negative impact adding up to a nickel per share associated with the September action taken by the Office of the Comptroller stating that the firm had overcharged 700 commercial customers. The firm also returned $5.3 billion to shareholders in the form of share repurchases, as well as doubling the quarterly dividend to $0.20, now yielding 1.7%.
At quarter's end, tangible book value per share came to $33.54. At this morning's last sale of $46.71, the stock trades at 1.39 times tangible book, which is pretty cheap in my opinion for a large bank, unless your name is Citigroup. For Wells Fargo, the ongoing Fed asset cap continues to be an anchor around performance as well as a potential future catalyst for the stock.
Bank of America
Bank of America reported GAAP EPS of $0.85, beating Wall Street by about 15 cents. The firm generated revenue of $22.77 billion, up 12.2% year over year, and a beat of more than a cool billion greenbacks.
Let's do the whole segment roll call for BAC...
- Consumer Banking.... Revenue increased 10% to $8.8 billion, driven by improved net interest income. Average deposits grew 16% offset by average loans and leases that decreased by 12%. Consumer investment popped 32% to $353 billion. Net income improved 48% to $3 billion on decreased non-interest expenses and a slight improvement in provisions for credit losses.
- Global Wealth and Investment Management... This unit produced revenue of $5.3 billion, up 17%, driven by asset management fees and stronger loan and deposit growth. Balances increased some 20%. Net income ramped 64% to $1.225 billion despite some small growth (6%) in non-interest expenses, provisions for credit losses did improve, but not in a very significant way.
- Global Banking... Total revenues popped 16% to $5.244 billion, driven by investment banking fees, and string deposit growth which in turn produced improved NII. Net income increased 175% to $2.549 billion, as net provisions for credit losses had a huge positive impact for this segment, despite an outright increase in non-interest expenses.
- Global Markets... produced revenue of $4.519 billion, up 6%. Fixed Income trading revenue decreased 5% to $2 billion, while equity trading revenue increased 33% to $1.6 billion. Net income increased 7.2% to $941 million. Provisions for credit losses were not really a factor here.
Provisions for credit losses add up to a net benefit of $624 million, which includes a reserve release of $1.1 billion. All in all, this is a very strong earnings release, with pure growth across a number of traditional banking businesses. The firm returned nearly $12 billion in capital to shareholders over just three months.
Tangible book value per share for BAC amounts to $21.69, meaning that the stock at $43.78 trades at slightly more than two times tangible book.
Summary
Despite the apparent appetite for the long end of the U.S. Treasury curve, I do see some expansion in yield spreads moving into 2022. How that could backfire would be the FOMC lifting short-term interest rate targets while the longer end does not move. That is a possibility, and would be a disaster for net interest margin.
I remain long both Wells Fargo and Bank of America. Bank of America obviously posted the higher quality beat and is showing top line growth in many spaces where Wells Fargo is not. That said, Wells Fargo is more restricted in what they can do, but that does provide for a future catalyst... and I do believe that Charles Scharf is the right CEO for this firm at the right time.
I currently have a $53 target price on BAC. This one is an add at $42, and a panic at $38. My current price target for WFC is $61, but that includes a Fed bestowed gift that provides momentum allowing the stock to get around a $51 pivot. I add close to $42.
I am still running with a small to medium-sized long trade in Goldman Sachs (GS) for Friday based upon a belief that GS may have traded fixed income a little better than everyone else while at least providing in-line equity performance.
My favorite financial name at the moment is still SoFi Technology (SOFI) as I believe that Anthony Noto has all of these guys in his sights.
