What To Watch As Banks Release Earnings

Includes: BAC, JPM, WFC
by: Nizar Tarhuni

As banks get ready to report 2013 Q4 earnings this week, I spent the weekend combing through Q3 earnings reports of JPMorgan Chase & Co. (NYSE:JPM), Bank of America (NYSE:BAC), and Wells Fargo & Company (NYSE:WFC) -- the three largest American banks by revenue. The turnaround these banks and their respective stocks have made since the most recent financial crisis has been rather impressive, and while top-line revenues may still be weak relative to 2012 results, banks appear to be managing the low-rate environment well. Bank stock valuations are also yet to be stretched, and potentially contain significant upside as they continue to strengthen their businesses.

JPMorgan Chase will kick off a string of financial earnings releases this week. As they report along with other major banks, certain factors will be important to keep a close eye on in order to gauge the future potential of these firms. This article will identify a few factors I believe will be catalyst to the future performance of bank stocks. Below is a group of tables summarizing the financial results of each aforementioned bank.



Y-O-Y % Change

Net Income

Y-O-Y % Change




$5.8B (Excl. legal fees)


Consumer & Community Banking





Consumer & Business Banking





Mortgage Banking





Card, Merchant Services & Auto





Corporate & Investment Bank





Commercial Banking





Asset Management







Y-O-Y % Change

Net Income (Loss)

Y-O-Y % Change






Consumer & Business Banking





Consumer Real Estate Services





Global Wealth & Investment Management





Global Banking





Global Markets




Decrease from ($276M)



Y-O-Y % Change

Net Income (Loss)

Y-O-Y % Change






Community Banking





Wholesale Banking





Wealth, Brokerage & Retirement





What to Watch

Investors should closely watch top-line results as banks begin to release earnings this week. With the exception of Bank of America, the top revenue-generating American banks struggled to sustain revenue growth in key business segments through Q3. Headwinds to revenue growth in the form of low interest rates have existed; however, as yields such as the 10-year treasury rate have risen over the past three months, interest rate spreads should widen. That will aid revenue growth in community, consumer, and mortgage banking businesses among others. Below is a ix-month chart of the IEF, an exchange-traded fund that tracks seven- to 10-year Treasury bond prices. Remember, as rates increase, bond prices decrease, which is why the chart trends downward over the last three months.

Click to enlarge image.

Deposits are another important factor to keep track of this week. Per the earnings reports I read, banks have enjoyed a steady increase in deposit levels. However, these levels need to increase or remain flat in order for higher rates to benefit them, in my opinion. Lower deposits could entail a decrease in consumer activity -- offsetting interest rate income and leaving banks in their current financial situation, if not worse.

The third factor investors should look for is guidance and commentary regarding share repurchases. Last quarter Bank of America had only repurchased $1.9B out of a $5B share repurchase program. The company also stated it had another future repurchase that was due to settle during the fourth quarter. Furthermore, Wells Fargo commented on its practice of creating shareholder value through dividends and share buybacks, while JPMorgan has kept its "fortress" balance sheet intact, allowing it to remain financially liquid if repurchase opportunities arise.

Investors should also quickly look to identify global markets and trading activity. If trading desks of these major firms were to register modest to flat returns I would not be alarmed. 2013 markets rose tremendously and it is possible that capital preservation techniques could have been used as the year came to a close. In addition, banks such as JPMorgan and Bank of America contain significant fixed income businesses, and thus returns on that front could have been dampened as rates began to rise during the fourth quarter.

Last, interest income and loan growth will be telling measures for banks from a mortgage perspective. While modest and consistent mortgage loan growth is beneficial to banks, a significant rise in mortgage loans could prompt an increase in loss reserves, which can also hurt the bottom line. Moreover, rate increases could negatively impact already struggling refinancing businesses, influencing both revenues and net income.

Valuation and Conclusion

It is important to note that bank stock valuations still appear to be relatively attractive. Currently JPM, BAC and WFC trade at respective price-to-earnings ratios of 13.2, 26.2, and 12.1. This compares to an industry average of 14.6 and an S&P 500 average of 18.6. While BAC clearly trades at a P/E multiple higher than the industry and the market, it also trades at a price-to-book multiple of 0.8 and a dividend yield percentage multiple of 0.2. That's far less than the industry and S&P 500 averages for these respective valuation ratios. The industry average P/B ratio is 1.1 and the DYP ratio is 2.6. JPM and WFC trade at respective P/B multiples of 1.1 and 1.6, and a DYP multiple of 2.5.

Bank earnings will be very interesting to keep track of this week. Select business trends along with current stock valuation measurements suggest continued strength, yet the above listed factors will be critical in evaluating future performance as 2014 rolls on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.