Big Banks' Earnings Analysis
Morningstar's Jaime Peters breaks down Citi and J.P. Morgan's results plus what to expect for BofA and Wells Fargo on Wednesday.
Big Banks' Earnings Analysis
Jason Stipp: I'm Jason Stipp for Morningstar. Earning season has kicked off
now with Citigroup and J.P. Morgan both reporting.
Here with me to talk about their earnings as well as what's coming
up on the bank front is Jaime Peters. She's an equity analyst
covering the banking sector.
Thanks for joining me, Jaime.
Jaime Peters: Hello.
Jason Stipp: So let's start off with the two big ones that have reported. What's
your initial take after Citi reported today and how do you compare
Jaime Peters: I guess the big surprise is: There were no major surprises. We
expected fixed income trading revenues to go down; they did. We
expected consumer loan losses to kind of stabilize; they did. As a
result, actual earnings expectations fell right in line with what we
thought was going to happen.
Jason Stipp: So, coming up, Bank of America and Wells Fargo also reporting.
Do you expect no surprises on that front as well? What are you
looking at there?
Jaime Peters: For Wells Fargo, we're not expecting a lot of surprises. We're
going to see consumer loan losses again, probably be about the
same as third quarter. They're going to have TARP charges though.
As a result, earnings are probably going to be closer to break even
rather than the 50 cents they made last quarter.
On the other hand, for Bank of America, there could be some
surprises there. Brian Moynihan, new CEO, very possibly could
decide to go ahead and take that big bath and try to level the
playing ground for future times as far as credit losses go. So,
they're really the big question mark.
Jason Stipp: Interesting. So, you mentioned the TARP charges. Now, that
played into the J.P. Morgan versus Citigroup results, because Citi
did have to charge for that TARP. So, is there really, bottom line,
taking that out, was there a huge difference in the performance of
those two banks that we've seen so far?
Jaime Peters: There certainly is, because J.P. Morgan is the much better bank.
Citigroup still lost about a billion dollars after the TARP charges
were removed. And that's a result of the fact that they are just not
as large in investment banking and not quite as good as J.P.
Morgan has been with that sterling reputation that they have. And
J.P. Morgan benefited from that sizable investment banking
income. As a result, J.P. Morgan made 74 cents, whereas Citigroup
Jason Stipp: Okay. So, certainly some differences on the quality side. Now,
looking at the valuation front, where are these banks on the
valuation spectrum? Do they look reasonably valued, undervalued,
overvalued? Where do you see them?
Jaime Peters: Actually, across the board, slightly undervalued. We have all of
them rated at 4 stars right now. Twenty to thirty percent
undervalued over the long run. But, it's probably going to take
some time to get there.
Jason Stipp: So, J.P. Morgan results, in some ways, beat analyst's expectations,
but the stock was taken down. I know you're looking out longer
term, but what catalyst do you see, what's it going to take, maybe,
for those stocks to reach their potential value?
Jaime Peters: Well, right now we're still talking about consumer loan losses.
They've stabilized in the quarter. The banks may be expecting
them to get slightly worse next quarter, here in the first quarter of
2010. But, if you look out into the second half, if we find that peak
and it definitively turns for the better, what we have is accounting
for banks being really favorable for earnings to really pop.
Because they're now going to probably start under-provisioning for
credit losses, rather than over-provisioning. And that's going to fall
straight to the bottom line. And that should probably help drive
those stock prices up.
Jason Stipp: Interesting, so on the risk side of the equation, what question
marks, what potholes, could the banks hit between here and there?
Jaime Peters: There are a lot of potholes, unfortunately. We do have commercial
loan losses that have not been as bad as, maybe, some people
expect. It's always been the next shoe to drop--commercial real
estate. Jamie Dimon actually suggested that it dropped a while ago,
everybody just missed it, and it's going to probably stay bad.
You have consumer loan losses, which people are expecting kind
of a sharp recovery, in my opinion. And it's probably going to be
much more rounded at the top, which means that people are going
to have to push out their expectations a little bit. Additionally, we
have Obama administration's TARP tax that they suggested last
Is that really going to go through? Because, that's going to affect
banks with investment banking businesses like J.P. Morgan,
Citigroup, and Bank of America. Much more than a Wells Fargo,
who is mainly deposit funded.
Jason Stipp: Well interesting things to keep an eye on. Jaime, thanks for joining
Jaime Peters: Thank you.
Jason Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
Big Banks' Earnings Analysis
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