Q1 Earnings For 30 Big Banks: Headline Numbers And Observations

Summary

• Q1 earnings are now in for the nation's biggest banks: 20 of 30 beat consensus on GAAP EPS and several others beat on non-GAAP EPS.
• Banks saw meaningful loan growth in Q1 and forecast more ahead for 2022.
• Credit looks excellent and expenses ok.
• Economic uncertainty, fear of credit normalization, and arcane accounting issues weighing on bank stock prices.
• Overall, a solid quarter with banks showing momentum entering Q2.

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30 Big Banks

Assets as of 12/31/21 ($B.)

(ALLY)	Ally Financial Inc	$ 182
(AXP)	American Express Co.	$ 189
(BAC)	Bank of America Corp.	$ 3,169
(BK)	Bank of New York Mellon Corp.	$ 444
(C)	Citigroup Inc.	$ 2,291
(CFG)	Citizens Financial Group, Inc.	$ 188
(CMA)	Comerica Inc.	$ 95
(COF)	Capital One Financial Corp.	$ 432
(DFS)	Discover Financial Services	$ 110
(EWBC)	East West Bancorp, Inc.	$ 61
(FRC)	First Republic Bank	$ 181
(FITB)	Fifth Third Bancorp	$ 211
(GS)	The Goldman Sachs Group, Inc.	$ 1,464
(HBAN)	Huntington Bancshares Inc.	$ 174
(JPM)	JPMorgan Chase & Co.	$ 3,744
(KEY)	KeyCorp	$ 186
(MS)	Morgan Stanley	$ 1,188
(MTB)	M&T Bank Corp.	$ 155
(NTRS)	Northern Trust Corp.	$ 184
(NYCB)	New York Community Bancorp Inc.	$ 60
(PNC)	PNC Financial Services Group Inc.	$ 557
(RF)	Regions Financial Corp.	$ 163
(SBNY)	Signature Bank	$ 118
(SCHW)	The Charles Schwab Corp.	$ 667
(SIVB)	SVB Financial Group	$ 211
(STT)	State Street Corporation	$ 315
(SYF)	Synchrony Financial	$ 96
(TFC)	Truist Financial Corp.	$ 541
(USB)	U.S. Bancorp	$ 573
(WFC)	Wells Fargo & Co.	$ 1,948

Good News

Q1 EPS Beats Consensus Overall

My April 7 article for Seeking Alpha addressed consensus Q1 earnings estimates for the nation's 30 largest banks.

This chart below shows GAAP Q1 earnings compared to April 7 consensus.

Twenty of thirty banks beat consensus based on GAAP earnings. Several more beat analyst expectations on non-GAAP EPS.

Headline observations:

• Explained GAAP "misses" fall into three categories:
  • Merger costs (SCHW, TFC, HBAN),
  • Accounting (ALLY Financial)
  • Provision (JPMorgan Chase).
• Explained GAAP "beats" driven by three principal factors:
  • Merger costs (M&T)
  • Provision (Citi, WFC, SYF)
  • Overly dour consensus (GS, AXP, FRC).

Q1 EPS Actuals to Consensus (Ycharts)

Credit Quality

You could never tell from recent bank stock price trends, but credit quality remains excellent across the industry. Here are a few comments made during recent earnings calls:

• USBank: "Credit quality continues to be strong across our loan portfolio."
• Comerica: "As far as credit... our metrics remain excellent."
• Truist: "Credit quality remains excellent."
• Huntington: "Record low net charge-offs..."
• First Republic: "Credit quality remained very strong."
• Wells Fargo: "Credit performance remained incredibly strong."

Loan Growth

Bank investors have not heard this message in a while: Solid loan growth in Q1.

My guess is that the growth reflects two trends: 1) Inflation similar to how nominal GDP looks fantastic but real GDP not-so-much. 2) True organic growth reflecting consumer health and businesses building inventory and bring supply chains to the U.S.

You know loan growth is good when even Wells Fargo got into the act. Note, too, the strong forecast for 2022 growth as observed by several bank CEOs and CFOs. Loan growth is an encouraging sign as it bodes well for net interest income and economic recovery.

• Wells Fargo: "We have broad-based loan growth with both, our consumer and commercial portfolios growing from the fourth quarter."
• KeyBank: "Our strong loan growth benefited net interest income, which came in above our expectations."
• Bank of America: "We saw a strong loan growth."
• Capital One: "... strong loan growth in our Consumer Banking business."
• Comerica: "Loan growth in the first quarter was solid and exceeded our expectations in several businesses."
• New York Community: "We're looking at a high single-digit net loan growth story for 2022."
• Ally Financial: "... robust loan growth."
• JPMorgan Chase: "Regarding loan growth. We're continuing to see positive trends with loans up 8% year-on-year."
• PNC: "... for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 10%."
• East West Bank: "We are updating our loan growth outlook for the full year to a range of 13% to 15%."
• First Republic: "We continue to expect mid-teens loan growth for the full year of 2022."

Consumer Health

Consumers are healthy. Helped by aggressive Federal government Covid relief, strong jobs trends, and low interest rates, consumer balance sheets may be as good as the U.S. has seen in three decades. Banks engaged principally in mass market consumer lending are big beneficiaries.

Banks have yet to see credit "normalize." Consequently, Provision expense and charge-offs remain well below historic averages. I remain skeptical, however, that the quite favorable trends will persist for all banks through 2023 as I wrote recently in this Seeking Alpha article.

• Ally: "The U.S. consumer remains healthy with historically low debt servicing levels, significantly elevated household savings and a tight labor market that’s coming with strong wage growth."
• Discover: "... the economic view of the U.S. consumer remains healthy."
• Synchrony: "Our portfolio's strong delinquency trends have continued to drive year-over-year improvement... reflecting a very healthy consumer."
• Capital One: "...the U.S. consumer continues to be strong."
• JPMorgan Chase: "The consumer has money. They pay down credit card debt. Confidence isn't high, but the fact that they have money, they're spending their money. They have $2 trillion still in their savings and checking accounts, business is in good shape. Home prices are up. Credit is extraordinarily good."

Most Positive Bank Reports

First Republic's call included Jim Herbert, founder of the bank. This was especially great news given his recent health scare. The bank issued remarkable credit quality and blow-out growth numbers in Q1.

Another California Bay Area bank, SVB Financial, delivered big in Q1, "reporting an excellent quarter of strong earnings and profitability." The market responded with a 10% pop in price which then evaporated over the subsequent week.

American Express's first quarter revenue growth of 29% year-over-year is significant. The bank's industry-leading valuation appears well-deserved.

Bad News

Most Worrisome Report

The Truist analyst call was disconcerting. Something is not right at Truist when the Q1 earnings call included 40 specific references to the words, "merger" and "integration." Bear in mind, the BB&T-SunTrust merger was announced more than three years ago. I smell problems. Keep an eye on Truist.

Most Worried Bank CEO

No question about it, Jamie Dimon of JPM. Three facts stand out: 1) His Letter to Shareholders in the 2021 Annual Report reveals a number of macro worries captured in this one statement: "We are facing challenges at every turn." 2) Dimon's comments during the Q1 earnings call reinforced concerns described in the Shareholder Letter. 3) The fact that JPM boosted Provision/ALLL to cover unspecific potential future credit losses is noteworthy. Go back to 2006 and you will see that Dimon was the most worried big bank CEO in the country. When Dimon worries, investors are wise to worry too.

Uncertainty

The word "uncertainty" popped up across many earnings calls. The bank with the most frequent mentions during Q1 earnings calls was Citi which included eleven references.

No word better describes the plight of Citi than "uncertainty." My view on Citi is that it is an aircraft carrier in need of years of repair. Avoiding as noted in this December 2021 article.

During the Q1 earnings call, Bank of NY's CEO summed up the uncertainty concern in this statement: "We are in an increasingly uncertain environment, including the war in Ukraine, volatile markets and persistently higher inflation, which will require more meaningful monetary policy adjustments

That's a lot of uncertainty.

The Not-So-Good

Accounting/Regulatory Jargon

I am not a fan of bank CFOs and analysts spouting accounting and regulatory jargon during earnings calls. Banks should attempt to talk about quarterly performance in laymen's language. Some bankers do an excellent job in this regard.

However, I found myself over-dosed on acronyms while reading the JPM Q1 Call Transcript. JPM is not alone in needing to make earnings calls intelligible to investors. Working hard to cut out acronyms would be a great start for bank CFOs.

Accounting issues obscured earnings at Ally, a topic I addressed in this post-earnings April 2022 Seeking Alpha article.

Rising interest rates triggered accounting issues for banks' securities available for sale. Known as "ACI" and "AOCI," several banks used a good portion of their earnings calls getting into the accounting treatment of securities. Here is an example drawn from the Truist Q1 earnings call:

"In order to mitigate ACI risk and volatility, we transferred approximately 40% of the securities portfolio to held to maturity during the first quarter. Because we are a Category 3 institution, AOCI does not impact regulatory capital, it simply impacts tangible common equity. We submitted our capital plan to the Federal Reserve in early April and look forward to sharing more details later this summer.

Provision/CECL

Speaking of acronyms, nothing bothers me more as a bank investor than the accounting industry's push to change how bank's determine Provision expense. I have written about this subject on these pages numerous times. It was nice to see Jamie Dimon of JPM offer his view of CECL during the Q1 earnings call.

Here is what he said: " I don't want to spend a lot of time on CECL. I think it's a complete waste of time.

He is not alone among bankers frustrated with CECL which is a clever acronym for a not-so-clever 2020 change to how banks determine Provision expense.

Forecasting Provision continues to be a challenge for bank analysts. In Citi's case, Q1 Provision expense was unexpectedly favorable to analyst estimates, prompting one analyst to ask this question of Citi's CEO during the Q1 call:

"So, when I first looked at the reserve release, even including the $1.9 million Russian reserve, we’re like, wait, what economic scenario they are writing to, because everybody else added provisions."

Expenses

Investors did not like the material increase in marketing and other operating expenses at Capital One. As a result, the bank's stock price plummeted almost 10% from pre-earnings to post-earnings. Looks like an over-reaction to me.

Bank expenses looked ok across-the-board for the industry. Investors need to keep an eye on non-interest expenses in Q2, especially personnel, given inflationary pressures and talent gaps.

Closing Thoughts

Good quarter overall although bank investors would not know it given the 11% average decline in stock price over the past thirty days (compared to -5.2% for the S&P 500).

That said, uncertainty weighs heavy on bank stocks.

So too do valuations, the topic of my next planned article.

Disclosure: I/we have a beneficial long position in the shares of JPM, SIVB, FRC, WFC, ALLY either through stock ownership, options, or other derivatives. 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.