Banks’ income shows that lenders are not equal. It’s time to dump her and move on.
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JPMorgan Chase and Citigroup both reported declines in trading revenues.
Justin Sullivan / Getty Images
The time has come to take a stock-picking approach to investing in banks. That was the lesson Friday morning, when three of the largest U.S. lenders reported their fourth-quarter results.
Over the past two years, investors have been rewarded for investing broadly in the sector, which
SPDR S&P Bank ETF
(KBE) climbed 28%. Investors who bought at the sector’s lowest level in March 2020 were rewarded with steeper gains. Even in the first two weeks of the year, banks have been a winning investment: Bank ETFs are up 10%, surpassing the loss of 2.2% in
S&P 500.
But as the sector moves past the effects of the pandemic, banks are no longer a spectacle of economic recovery. This makes the question of who is best positioned in the post-pandemic world more important for investors.
Just take a look at the immediate stock reaction to fourth quarter results
JPMorgan Chase
(ticker: JPM),
Citigroup
(C), and
Wells Fargo
(WFC). JPMorgan was a fan of much of the pandemic due to an increase in trading activity and the conclusion of agreements, but as trading levels retreat from pandemic heights, it seems that other banks’ time is shining.
Shares in JPMorgan fell 5% moments after Friday’s opening, while Citigroup shares fell 1.9%. Wells Fargo was the outermost, with shares up 2.6%. At the end of the day, JPMorgan was down 6.2%, Citigroup had fallen 1.3%, and Wells Fargo had gained 3.7%.
Here is what we have learned so far from bank income, and how lenders are doing in some important areas.
Loan growth remains a wildcard. While investors have been eager to see banks post higher lending growth, they may have to wait, based on Friday’s results. Lending growth has been stagnant – and in some cases declining – during the pandemic because businesses and households either felt too scary to borrow, or were inundated with money when the government distributed cash to households to put pressure on the economy.
JPMorgan was the winner, saying that loans increased by 6% year over year. The bank’s asset and asset management department had an increase of 18%, mainly driven by securities-based lending. Card and car loans also increased.
But at Wells Fargo, loan balances fell 3% compared to the end of last year, although the bank registered an increase in loans in the second half of 2021. Citigroup saw a fall of 1% year-over-year in loan balances.
An increase in lending growth will help banks, especially with the Federal Reserve ready to raise interest rates this year. This will increase the difference between the interest rates the banks receive on loans and the interest rates they pay on deposits.
The costs are increasing. And while investors may be willing to wait a little longer for lending growth to resume, they appear to have been less forgiving of higher spending.
JPMorgan posted higher costs than expected due to compensation and expenses for marketing and technology. Even worse, the bank said it expects full-year spending to increase by almost 9% to $ 77 billion by 2022.
Citigroup also had higher expenses. It registered an increase of 18% due to recent divestments and efforts the bank is making to streamline operations after receiving a consent order from regulators in October 2020 for weaknesses in internal controls.
Wells Fargo went against the herd, with a 11% drop in spending from year to year due to the reduced number of employees from selling businesses and relying less on external consultants. Wells Fargo’s efficiency ratio – a measure of expenditure as a percentage of revenue – improved, falling to 63% from 80% last year.
Trade is weak. The economic uncertainty for much of the last two years allowed banks to profit from increased trading activity, but these days may be a thing of the past.
Both JPMorgan and Citigroup saw an 11% decline in trading revenues, with double-digit interest rate declines in both banks. Trade revenues at Wells Fargo were flat year over year.
Wall Street will get a taste of what awaits banks when
Goldman Sachs
(GS),
Bank of America
(BAC), and Morgan Stanley (MS) report earnings next week.
Write to Carleton English at carleton.english@dowjones.com