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 were rewarded for investing broadly in the sector, as the SPDR S&P Bank ETF (KBE) climbed 28%. Investors who bought at the sector’s lows in March 2020 were rewarded with steeper gains. Even in the first two weeks of the year, banks have been a winning investment: The bank ETF is up 10%, outperforming the 2.2% loss in the S&P 500.
But as the sector moves past the effects of the pandemic, banks are no longer a play on the economic recovery. That makes the question of which is best positioned in the postpandemic world more important for investors.
Just take a look at the immediate stock reaction to fourth-quarter results from JPMorgan Chase (ticker: JPM), Citigroup (C), and Wells Fargo (WFC). JPMorgan was a darling for much of the pandemic due to a surge in trading activity and deal-making, but as trading levels retreat from pandemic highs, it appears to be other banks’ time to shine.
Shares of JPMorgan slid 5% moments after Friday’s open, while Citigroup shares were off by 1.9%. Wells Fargo was the outlier, with shares up 2.6%. By the end of the day, JPMorgan was down 6.2%, Citigroup had fallen 1.3%, and Wells Fargo had gained 3.7%.
Here’s what we’ve learned so far from bank earnings, and how the lenders stack up in some key areas.
Loan growth remains a wild card. While investors have been eager to see banks post higher loan growth, they may have to keep waiting, based on Friday’s results. Loan growth has been stagnant—and in some cases, declining—during the pandemic because businesses and households were either feeling too skittish to borrow, or were awash with money as the government handed out cash to households to juice the economy.
JPMorgan was the winner, saying loans were up 6% year over year. The bank’s asset and wealth management division notched an 18% increase, driven mostly by securities-based lending. Card and auto loans increased, too.
But at Wells Fargo, loan balances fell 3% compared with the end of last year even though the bank noted a pickup in loans in the second half of 2021. Citigroup saw a 1% year-over-year drop in loan balances.
A pickup in loan growth would help banks, especially with the Federal Reserve poised to raise interest rates this year. That would widen the spread between the interest banks earn on loans and the interest they pay on deposits.
Costs are up. And while investors may be willing to wait a little longer for loan growth to resume, they seem to have been less forgiving of higher expenses.
JPMorgan posted higher-than-expected costs due to compensation and spending on marketing and technology. Even worse, the bank said it expects full-year expenses to increase by almost 9% to $77 billion in 2022.
Citigroup also posted higher expenses. It recorded an 18% increase due to recent divestitures and efforts the bank is making to streamline its operations after being slapped with a consent order by regulators in October 2020 for weaknesses in its internal controls.
Wells Fargo went against the herd, posting an 11% drop in year-over-year expenses due to reduced head count from selling businesses and relying less on outside consultants. Wells Fargo’s efficiency ratio—a measure of expenses as a percentage of revenue—improved, dropping to 63% from 80% last year.
Trading is weak. The economic uncertainty of much of the past two years allowed banks to profit handsomely from increased trading activity, but those days may be in the past.
Both JPMorgan and Citigroup saw 11% decreases in trading revenue, with fixed- income trading down double digits at both banks. Trading revenue at Wells Fargo was flat year over year.
Write to Carleton English at [email protected]