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April 13, 2020, 4:44 a.m. EDT

Bank earnings preview: As industry profits get cut in half, the winners will emerge next year

What really matters is how well a lender can fare during a depression-level drought

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By Philip van Doorn, MarketWatch

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For Goldman Sachs, the KBW team sees “compelling” valuation for the shares, based on their earnings projections.

Oppenheimer

Chris Kotowski and the team of analysts at Oppenheimer used the Federal Reserve’s “severely adverse” economic scenario from last year’s industry stress tests to estimate banks’ earnings performance through a coronavirus recession. That scenario includes a peak unemployment of 10%, which may turn out to be rather low for 2020.

The analysts expect unemployment to peak between July and September, leading to maximum loan losses during the first quarter of 2021. “Thus, we see core economic earnings (i.e. pre-provision earnings less net charge-offs) declining throughout 2020, bottoming in 1Q21, and returning to more or less normal by 4Q21,” Kotowski wrote in a note to clients on March 31.

The large banks have stopped buying back shares in an effort to build up capital. Kotowski doesn’t believe the banks will need to raise capital by issuing new shares.

Some analysts have said that industry dividends appear to be safe, but Kotowski is more cautious. He expects the large banks to earn enough to cover their dividends on a full-year basis for 2020 and 2021, even though there will be some quarters during which they don’t.

“We suspect that whatever happens on the dividend-reduction front will be similar to when the Financial Services Forum announced that all the large U.S. banks would suspend share buybacks in unison.”

That announcement was made in mid-March. If the big banks go on to suspend dividends, Kotowski expects a similar industry-group announcement, since individual decisions “would stigmatize the first bank to announce such a move as ‘weak.’ ”

Here are Oppenheimer’s updated and previous estimates for the same group of large banks for 2020 and 2021:

Bank Ticker 2020 EPS estimate - March 31 2020 EPS estimate - previous 2021 EPS estimate - March 31 2021 EPS estimate - previous
J.P. Morgan Chase & Co. JPM $7.72 $10.89 $7.55 $11.85
Bank of America Corp. BAC $1.93 $2.93 $1.85 $3.20
Citigroup Inc. C $4.09 $8.77 $3.71 $9.75
Wells Fargo & Co. WFC $2.50 $3.92 $2.79 $4.32
Goldman Sachs Group Inc. GS $9.52 $25.08 $18.55 $27.62
Morgan Stanley MS $3.72 $5.30 $4.49 $5.70
Source: Oppenheimer

Oppenheimer has “outperform” ratings on Bank of America, Citigroup, /zigman2/quotes/207741460/composite C +1.11% , Goldman Sachs and Morgan Stanley /zigman2/quotes/209104354/composite MS +2.99% , with neutral “perform” ratings on J.P. Morgan and Wells Fargo /zigman2/quotes/203790192/composite WFC +0.37%

Here are Oppenheimer’s updated price targets for the four buy-rated banks:

Bank holding company Ticker Price target - March 31 Previous price target Closing price - April 6 Implied 12- to 18-month upside potential based on new price target
Bank of America Corp. /zigman2/quotes/200894270/composite BAC   $30.00 $45.00 $21.39 40%
Citigroup Inc. /zigman2/quotes/207741460/composite C   $93.00 $122.00 $41.12 126%
Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS   $278.00 $367.00 $158.23 76%
Morgan Stanley /zigman2/quotes/209104354/composite MS   $46.00 $76.00 $37.01 24%
Source: FactSet

Don’t miss: Three stocks to buy during the coronavirus crash — besides the usual suspects

/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 50.88
+0.56 +1.11%
Volume: 19.12M
July 8, 2020 4:02p
P/E Ratio
7.06
Dividend Yield
4.01%
Market Cap
$104.76 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/209104354/composite
US : U.S.: NYSE
$ 48.91
+1.42 +2.99%
Volume: 12.32M
July 8, 2020 4:02p
P/E Ratio
10.18
Dividend Yield
2.86%
Market Cap
$74.83 billion
Rev. per Employee
$831,709
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 24.55
+0.09 +0.37%
Volume: 38.41M
July 8, 2020 4:02p
P/E Ratio
8.67
Dividend Yield
8.31%
Market Cap
$100.29 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 23.10
+0.09 +0.39%
Volume: 52.92M
July 8, 2020 4:00p
P/E Ratio
9.43
Dividend Yield
3.12%
Market Cap
$199.63 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 50.88
+0.56 +1.11%
Volume: 19.12M
July 8, 2020 4:02p
P/E Ratio
7.06
Dividend Yield
4.01%
Market Cap
$104.76 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 202.25
+2.89 +1.45%
Volume: 2.79M
July 8, 2020 4:00p
P/E Ratio
10.99
Dividend Yield
2.47%
Market Cap
$68.56 billion
Rev. per Employee
$1.34M
loading...
/zigman2/quotes/209104354/composite
US : U.S.: NYSE
$ 48.91
+1.42 +2.99%
Volume: 12.32M
July 8, 2020 4:02p
P/E Ratio
10.18
Dividend Yield
2.86%
Market Cap
$74.83 billion
Rev. per Employee
$831,709
loading...

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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