Facebook
Twitter
2016 has been a very difficult year for the nation’s big banks, including Wells Fargo (NYSE: WFC) and JP Morgan Chase (NYSE: JPM), which both reported third-quarter earnings before the bell on Friday.
JP Morgan and Wells Fargo, the nation’s No. 1 and No. 3 respective banks by assets, have grappled with a number of headwinds this year. For example, global geopolitical risk reared its ugly head once again after the Brexit vote this summer. And, interest rates remain near historic lows in the U.S., which has suppressed their earnings power.
The market hates uncertainty, but this is a very uncertain period for JP Morgan and Wells Fargo. Here is a rundown of the good, the bad, and the ugly from the big banks’ earnings in the third quarter.
JP Morgan’s Stellar Quarter
It was a great quarter for JP Morgan across the board. JP Morgan earned $1.58 per share on $25.51 billion in revenue. Both figures handily beat analyst projections, which called for $1.39 of EPS and $24 billion of revenue.
All of its various business segments performed well last quarter. In consumer banking, average loans and deposits increased 19% and 11%, respectively. JP Morgan produced record profit in commercial banking, which soared 50% to $778 million. Investment bank revenue increased 16% year over year, and reached its highest third-quarter revenue ever.
Going forward, JP Morgan should benefit from higher interest rates. The Fed raised interest rates last December, which was the first rate hike in nearly a decade. This propelled 6% growth in net interest income. It is widely expected that the Fed will hike rates again before the end of 2016, which will serve as an additional catalyst next year.
Why Wells Fargo May Have a Tough Road Ahead
Like JP Morgan, Wells Fargo delivered a beat on both the top and bottom lines. But its performance was much less impressive than JP Morgan’s. Wells Fargo reported $1.03 of earnings per share for the third quarter, which beat analyst expectations by just $0.02 per share. Revenue of $22.3 billion also barely beat expectations, by $100 million.
The good news for investors is that Wells Fargo continues to generate strong growth in loans and deposits, which were up 7% and 5%, respectively. The reason for this is the improving health of the U.S. consumer. The labor market is firming, and home prices are rising across many parts of the country. With low gas prices, the U.S. consumer is enjoying rising levels of discretionary income.
Meanwhile, Wells Fargo’s “ghost account” scandal looms large and could negatively impact its earnings results in future quarters. Last quarter, Wells Fargo was hit with a $185 million fine after employees created millions of new accounts for customers. This was done without customers’ approval, and it eventually cost the CEO his job.
Wells Fargo did not see much damage from this last quarter, but it is likely the impact will be felt for several quarters to come. Wells Fargo’s brand image has been significantly tarnished, which is probably why the stock price fell after reporting, even though the company beat on revenue and earnings.
Catalysts for Big Banks
Both JP Morgan and Wells Fargo should benefit from rising interest rates moving forward. That, along with the steady improvement in the U.S. economy, will be major catalysts for the two big banks in 2017 and beyond.
However, Wells Fargo faces significant headline risk from the recent scandal, which could limit its future growth.
The good news is that both stocks are cheap and reward shareholders with solid dividend yields. Both stocks exchange hands for roughly 11 times earnings, which is significantly cheaper than the S&P 500 P/E multiple of 20.
And, they are both above-average dividend stocks. Wells Fargo stock currently yields 3.4%, which is appreciably higher than the 2% average dividend yield in the S&P 500. For comparison, JP Morgan stock offers a 2.8% dividend yield.
The road ahead is likely to be bumpy for Wells Fargo, but assuming it recovers from its recent scandal over time, both bank stocks could be tempting buys for value and income investors.