Following their latest earnings reports, value investor and money manager John Buckingham — editor of The Prudent Speculator — reviews several of his recommended financial sector stocks.
The country’s largest financial giants JPMorgan Chase (JPM) and Bank of America (BAC) each released Q3 results that handily topped the consensus analyst estimates as momentum from fee businesses at both banks persisted.
JPM earned $3.74 in Q3 versus the $2.97 expected by analysts, 28% higher than in Q3 2020, with the numbers boosted by an unrelenting performance in trading (strong equity trading made up for a decline in typically strong FICC trading) and investment banking. Average loans grew 5% year-over-year, a result of higher balances in wealth management given modest declines in consumer and commercial banking.
The bank continues to possess an enormous amount of liquidity ($1.6 trillion) given the 19% growth of average deposit growth over the past year while loans have remained mostly flat to negative. Net charge-offs are very much in check at 25 basis points of average total loans.
Earnings at Bank of America grew 67% year-over-year to $0.85 per share, nearly 20% better than the consensus analyst estimate, on $22.8 billion of revenue. Net interest and noninterest income grew 11% and 14%, respectively, while a negative $2 billion credit provision added to the bottom line.
Total deposits (nearly $2 trillion) continued to grow and loan balances ($937.2 billion) returned to modest growth versus Q2, while credit quality remains historically strong as net charge-offs were 20 basis points of average total loans. Combined assets under management within Global Wealth and Investment Management grew nearly 20%, while investment banking delivered $2.2 billion of fee revenue.
We appreciate that the enormous amounts of stimulus injected throughout the pandemic has contributed to a very strong customer base for nearly the entire U.S. banking system and we expect persistent spending patterns to eventually show up in higher loan balances.
Even as fee business remains strong, loan growth is critical in the coming years as the spread between short- and long-term Treasury yields remains in line with the average over the prior decade despite being lower on an absolute basis overall. Moreover, the ratio of loans relative to total deposits at both banks is at a decade low (down from 62% for JPM and 86% for BAC in 2011).
Both JPM and BAC remain favored holdings in many of our diversified portfolios as we continue to like the multiple levers both banks possess to generate business with opportunities (especially at BofA) to elevate operating leverage through expense improvement. And, both banks remain active purchases of their own shares with share counts falling by 2.0% and 4.7% at JPM and BAC, respectively, relative to outstanding totals at the beginning of 2021.
Nevertheless, we are mindful that shares aren’t as inexpensive relative to history with JPM and BAC trading at a 25% and 35% respective premium to their average price-to-book value ratios over the past five years. Also, our positions in each have become elevated in some portfolios. While we wouldn’t rule out giving each a trim in the not-too-distant future, we are comfortable holding JPM and BAC for increased Target Prices of $190 and $51, respectively.
Morgan Stanley (MS) reported another strong quarterly report by the Wall Street titan. For Q3, MS delivered adjusted EPS of $2.04, more than 20% better than the consensus forecast of $1.69. MS posted revenue of $14.75 billion, almost 6% ahead of the average projection.
The quarterly beat was driven by much-stronger-than-expected revenue growth in the Capital Markets segment, with advisory revenue of $1.3 billion (nearly four times that of a year ago) and equity trading revenue up 24% year-over-year, coming in at $2.9 billion.
The company’s Wealth Management (WM) business continued to realize solid momentum, seeing $135 billion of new assets in the period (vs. $71 billion in Q2 2021), with fee-based assets ticking up to 48% of the WM total. Investment Banking continued its strong operations with revenue up 67% from a year ago on record advisory revenue, driven by higher completed M&A transactions.
While we continue to like the long-term prospects of MS, we note that the position may have grown large in some accounts, given our initial recommendation in September 2020 at $48.35, so we wouldn’t fault anyone for taking a few dollars off of the table in the current price range.
For the balance of our holdings, we continue to like the diversifying acquisition of Eaton Vance and we also believe the addition of E*Trade gives MS greater scale in tech, a deeper product and service base, and self-directed investors to complement advisor-assisted wealth-management clients.
We continue to see MS benefiting from strong capital market activities and we like the opportunity to take larger wallet share in wealth management (as was realized in Q3). We like MS’s lower exposure to consumer and commercial loans, healthy balance sheet, relatively attractive valuation and 2.7% dividend yield. Our Target Price has been lifted to $115.
Goldman Sachs Group (GS) reported another stellar quarter. GS turned in a top line of $13.6 billion, which was more than 17% higher than expectations, and adjusted EPS of $14.93, better than 50% above the consensus analyst estimate of $9.92. In the first nine months of 2021, the firm generated net revenue of $46.70 billion, net earnings of $17.70 billion and diluted EPS of $48.59, each surpassing the previous full year records.
Investment Banking posted its second highest quarterly net revenue of $3.70 billion, reflecting record quarterly net revenue in Financial advisory and continued strength in Underwriting. The firm remained ranked #1 in worldwide announced and completed mergers and acquisitions, and in worldwide equity and equity-related offerings, common stock offerings and initial public offerings for the year-to-date
Although shares are up almost 54% this year, we see the stock as still attractively valued, trading at less than 11 times NTM consensus earnings projections, not to mention that the firm operationally is firing on all cylinders. We continue to like the healthy balance sheet and ongoing sound strategic repositioning.
The build-out of its traditional banking and investment management businesses should serve shareholders well in the long run, as almost two-thirds of Goldman’s revenue still comes from its investment banking and global markets trading business segments. Like we stated after Q2 earnings, we find it odd that shares aren’t trading at much higher levels, especially considering that Goldman could deliver $60 per share of earnings this year.
We continue to like that the ultimate goal of Goldman’s evolution is to change the trading and deal making titan into a more well-rounded financial firm with more-stable consumer and commercial businesses. The dividend yield is 2.0%, and our Target Price has been hiked to $467.
Citigroup (C) posted Q3 results that beat the consensus analyst estimate (EPS of $2.15 vs. $1.79 est.). Solid growth of investment banking fees year-over-year contributed to a 3% increase in the Institutional segment.
Global Consumer Banking revenue grew 2% when adjusted for the sale of the Australia division as a $1.1 billion credit release was a net benefit to the bottom line. Similar to large banking peers, credit losses remain de minimis at 28 basis points of total loans.
We continue to monitor Ms. Fraser’s efforts to clean up Citi’s risk and regulatory issues and streamline the bank. We are also watching trends in card spending and balances, which represent a larger percentage of Citi’s business than peers. As the most globally focused of the money-center banks, Citi’s recovery remains more closely tied to recovery abroad, although we continue to think opportunities for elevated growth exist from exposure to developing markets.
Despite the baggage, we like that management is focused on exiting underperforming markets and that the stock is trading at roughly one times tangible book value per share (a large discount to peers), while offering a dividend yield of 2.8%. Our Target Price for C now resides at $105.
