The four biggest banks in the United States are set to announce earnings next week and the expectations show estimates are up from the second quarter, but down from last year.
The banks I’m referring to are Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC). Rather than list each company and its EPS estimate one by one, I put together the table below on Tickeron’s Screener. It shows all four companies and the current EPS estimate for the third quarter. We see that all four banks are expected to show pretty solid growth in earnings compared to the EPS numbers reported in the abysmal second quarter.
I wanted to take things a step farther and wanted to include a comparison to the results from the third quarter of 2019. The table below shows each bank’s EPS figures from Q2 2020 as well as Q3 results from 2019. All four banks are expected to show pretty sharp declines in earnings when compared to the results from the same period one year ago.
These results reflect what has happened in the economy since the COVID-19 pandemic hit the global economy in a massive way. The sharp selloff in the overall market from mid-February through late March hit the banks even harder. All four of the companies listed in the tables fell over 40% with Citi taking a hit of over 54% at the lows. Like the overall market, the banks have rallied sharply since March 23, but unlike the S&P, the banks aren’t back up to their pre-selloff levels.
Banks have seen a slight boost in the last few weeks and have outperformed the overall market. Part of that is due to a widening spread between short-term interest rates and long-term rates. A wider spread tends to help banks because they borrow at the short-end of the credit cycle and they tend to lend at the long-end of the cycle. This can help boost the profitability.
Looking at the fundamental factors and technical indicators ahead of the earnings reports, the fundamentals show themes in a couple of areas. The Outlook Ratings are positive for three out of the four, but only a neutral rating for Wells Fargo. The biggest trouble spot seems to be the SMR Ratings as all four get poor ratings from this indicator that measures sales growth, profit margin, and return on equity.
The technical picture seems to be a little better than the fundamental picture. Three of the four stocks have bullish signals from the RSI, the MACD, and the Momentum Indicator. JPMorgan Chase has two bullish signals and four neutral signals. Bank of America has four bullish signals and two neutral signals. All four have more bullish signals than bearish signals.
As for the overall picture, all four stocks currently have “buy” ratings on them and those ratings are primarily based on the short-term technical indicators. Personally I would rank Bank of America a little higher than JPMorgan Chase. I would rank Citigroup third and Wells Fargo would be ranked fourth. The reason for these rankings boils down to several factors. The fact that Bank of America has four bullish signals from the technical indicators is a big plus, and the fundamental ratings are very similar for JPMorgan. The technical picture gives the edge to BAC.
Citi has more negative readings than positive readings on the fundamental side, but has four bullish signals on the technical side. Wells Fargo has had many issues in recent years and that seems to be reflected in the stock performance in the last few years. WFC is down 43% in the past year and that is by far the worst performance of the four. It also only has two bullish signals compared to one bearish signal on the technical side.
One last factor in why I give a slight edge to Bank of America is the sentiment toward the four stocks. BAC has the highest short interest ratio of the four stocks and only 57.7% of analysts have the stock rated as a “buy”. Citigroup’s buy percentage is 83.3% and JPMorgan’s is 65.4%. Wells Fargo’s is 25.9%, but it has had so many legal issues and such that the bearish sentiment appears to be warranted.
When it comes to sentiment analysis, you want to view things from a contrarian viewpoint. The idea is that the less enthusiasm there is toward a stock, the greater the chance that it can rally as the enthusiasm grows more bullish. If the sentiment is already extremely bullish, the chances of a letdown are much greater.