Big Banks And Financials Facing Tough Compares From Q2 2021

Jun. 24, 2022 7:00 AM ETBAC, BRK.A, BRK.B, CME, GS, JPM, SCHW2 Comments11 Likes
Brian Gilmartin, CFA profile picture
Brian Gilmartin, CFA
9.07K Followers

Summary

  • GS is currently trading below its book value at $293 per share and at an expected 7x EPS for the next 3 years.
  • Berkshire Hathaway is down from $350 to $270 and is below its 50 and 200-day moving averages as are all the names mentioned above.
  • While all of these stocks are held by clients, in varying weights, the stocks may be added to or subtracted from depending on what happens with the yield curve or energy or gasoline over the next 3 weeks.

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The compares that the large-cap banks and tech companies are still facing with Q2 '22 financial results is still very formidable. Here's a quick rundown of the large banks and financials and what their Q2 '22 and the rest of 2022 hold:

JPMorgan (JPM): The stock is down from $172 to $115, with the recent 52-week low at $111. EPS and revenue estimates for Q2 '22 and for all of 2022 have actually risen since the April '22 earnings results, but the fact is EPS is still expected to decline 26% this year, while revenue is expected to grow 5%. Trading at 9x current EPS, JPM has not been this cheap to book value for quite some time, at 1.3x versus 1.9x at the end of March '21. The dividend yield at 3.5% isn't too shabby either.

In Q2 '21, JPM's EPS grew 178% y.y to $3.78 per share, versus the current estimate of $2.93 for Q2 '22. Revenue is expected to $31.9 bl vs the year-ago $30.5 billion. In 2019 JPM's EPS averaged about $2.68 - $2.70 per share over the 4 quarters so the "bowling ball passing through the snake" that is 2021 compares is going to be tough for JPM, however, the stock is pretty cheap here if you can look into 2023.

The big question is recession risk and Jamie Dimon has been outspoken on that.

If you think we are headed for a nasty recession, probably best to avoid the stock, but EPS and revenue estimates for 2022 - 2024 are still moving higher.

Goldman Sachs (GS): Goldman will be looking to print $8.59 on $11.9 billion in revenue for Q2 '22 y.y declines of 43% and 22% respectively. The compares for GS for Q2 '22 are just ridiculous and the comps don't get much better for the rest of the year. Goldman printed $15 and change in EPS for Q2 '21 and $14.93 and $10.81 for Q3 '21 and Q4 '21.

GS EPS grew 92% last year, while it's expected to decline -36% in 2022. That's the whole story right there, just like JPM.

GS is currently trading below its book value at $293 per share and at an expected 7x EPS for the next 3 years. The caveat is rising rates have shut down the refi biz for corporate bonds and mortgages, so FICC (fixed-income, currencies, and commodities) segment might have a tough few quarters. (This was cut-and-pasted from Tom Brown's blog on the banking business.)

Investment banking revenue fell 36% y.y in Q1 '22 while "pre-tax" earnings for banking fell 52%. Those tough compares don't get much easier until calendar 2023.

If you can be patient for the next 9 months to a year, GS below book value looks interesting.

Bank of America (BAC): In Q2 '21, BAC printed $1.03 in EPS on $21.5 bl in revenue versus the $0.82 expected in q2 '22. BAC grew EPS 102% last year, while the current consensus for full-year '22 is expecting a 6% decline in EPS. Book value for BAC is $30 per share so the stock closing at $32 - $33 today is just a 10% premium to BV. Tangible book is closer to $20 - $21 for BAC.

Trading at 11x EPS with a 2.60% dividend yield, BAC is cheaper now than it's been in the last 6 - 8 quarters.

BAC has a likely dividend increase coming up in Q3 '22: looking at the last four increases of $0.03 a share, expect BAC to boost the dividend from it's current $0.21 per quarter or $0.82 annually to $0.24 per quarter or $0.96 per year.

Charles Schwab (SCHW): Expecting $5 bl in revenue and $0.92 in EPS for Q2 '22, Schwab, unlike the large banks, Schwab is looking for y/y growth of 31% in EPS on 11% revenue growth. Schwab is still incorporating the TD Ameritrade merger, with onboarding expected to begin in 2023.

Unlike the big commercial and investment banks, at least according to the current sell-side consensus, Schwab is expecting healthy growth in 2022 and 2023. The stock has come down from $90 to $60 per share in the first half of '22, a sizable drop for a company that is still expecting 20% EPS growth in full-year '22 versus the 33% in '21. Revenue growth is still expected at 12% in '22, versus the merger-aided 58% revenue growth in 2021.

What I worry about is the pre-tax margin which is the holy grail for Schwab, and it was weaker in Q1 '22, as well as Schwab's net interest margin, but "Chuck" tends to correct issues in a hurry.

In Powell's last tightening cycle in 2018. Schwab corrected down from $60 to $40 and then in early '19 in Q1 '19 pre-tax profit margins exploded from 41.8% to 46.4%. Naturally, Schwab does better (as do most financials) with a steeper yield curve and easing monetary policy. It may be a while before we see those easier monetary conditions again, but Schwab is poised to grow (per the sell-side consensus estimates) even in this tough market. The expected EPS and revenue growth are still impressive despite the poor capital markets this year. At $62 per share, Schwab is trading at 19x earnings for expected 20% EPS growth this year. Yes, that's an "under 1x PEG" ratio.

Berkshire Hathaway (BRK.B): Just read a technician's analysis of BRK.B and it wasn't positive. The stock is down from $350 to $270 and is below its 50 and 200-day moving averages as are all the names mentioned above. Readers have an opportunity to buy Mr. Buffett's baby after a sharp drop this year. Clients own only a very small portion of BRK.B, but this latest drop may prompt me to add more. Having never been a big fan of the insurance business, I've never followed Berkshire fundamentally. An occasional glance at the EPS and revenue estimates and their trends is about as close as I get. When you Berkshire's stock (in my opinion) you are really buying Mr. Buffett's investment style and methodology, and that's ok with me. His higher profile energy purchases in '22 may be having a depressing effect on the stock.

Chicago Merc (CME): with the Treasury contract being 50% of CME's total volume, this has been a perfect year to own CME, except the stock hasn't really cooperated trading down from its all-time high near $250 in mid-March '22 to today's $208 per share. YTD CME is down -7.88% versus the SPY's -20% drop as of Wednesday night's, 6/22/22 close. Certainly, the relative performance is there, but I thought the stock would have performed better. CME's Treasury, energy, and commodities not to mention forex contracts were perfectly positioned for 2022's "anti-S&P 500 bull market" and yet its trade has been lackluster. EPS estimates continue to rise, more so than revenue estimates over the last few months. Clients won't likely see CME held if there is a US recession, at least a steeper one than current estimates reflect.

The irony to CME is that does NOT have a tough compare with Q2 '21 since the fed funds rate was still flat and the 10-year Treasury didn't begin to reflect Powell's hawking posturing until late in '21. CME's revenue fell 1% y.y in Q2 '21 and EPS rose 1% in Q2 '21, very easy compares for the exchange giant.

CME is trading at 30x expected 2022's EPS with 17% EPS growth expected this year on 8% revenue growth.

The expectation is that CME will have a strong Q2 '22 but the stock needs to respond, otherwise it might become a source of funds.

Summary/conclusion: It's going to be a tough quarter for the big banks as they will add to credit reserves and still face a flatter yield curve. Plus the capital markets will be a drag for JPM and BAC, and certainly GS. This is not a great "macro" environment for the bigger banks and their stock prices reflect all of this. The interesting aspect of the banks is that their revenue estimate revisions continue to be revised higher into the end of June. (This blog will have full previews on all of the above in early July '22.) Higher revenue estimate revisions aren't a bad thing. You'd tend to think the opposite with the stock and bond market action today.

Jamie Dimon was an eerily-accurate prognosticator of what was coming in 2008, so his own commentary of late may be killing his own stock. JPM is the cheapest I've seen in a few years. Goldman too, once again below book value although not as far below as late 2000.

None of this is a prediction or prognostication. While all of these stocks are held by clients, in varying weights, the stocks may be added to or subtracted from depending on what happens with the yield curve or energy or gasoline over the next 3 weeks. The plan is to update these names on this blog "pre-earnings" but time may not allow that to happen, depending on what else is happening.

Financials are a value sector within the S&P 500: certainly, JPM, BAC, GS, etc. fit that bill. Schwab and CME less so given their multiples.

Thanks for reading.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Brian Gilmartin, CFA profile picture
9.07K Followers
Brian Gilmartin, is a portfolio manager at Trinity Asset Management, a firm he founded in May, 1995, catering to individual investors and institutions that werent getting the attention and service deserved, from larger firms. Brian started in the business as a fixed-income / credit analyst, with a Chicago broker-dealer, and then worked at Stein Roe & Farnham in Chicago, from 1992 - 1995, before striking out on his own and managing equity and balanced accounts for clients. Brian has a BSBA (Finance) from Xavier University, Cincinnati, Ohio, (1982) and an MBA (Finance) from Loyola University, Chicago, January, 1985. The CFA was awarded in 1994. Brian has been fortunate enough to write for the TheStreet.com from 2000 to 2012, and then the WallStreet AllStars from August 2011, to Spring, 2012. Brian also wrote for Minyanville.com, and has been quoted in numerous publications including the Wall Street Journal.
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