JP Morgan, Goldman, Wells Fargo, Beat Earnings Forecasts
President Biden’s massive stimulus package and the continued vaccine rollout have acted like rocket fuel for the banking industry. Treasury yields are climbing; the 10-year rate has risen above 1%, again fattening the bottom line profits for lenders. While confidence in the U.S. economy is growing, so is investment banking activity, as SPACs fuel new investments.
Many believed the Covid-19 pandemic would lead to a dire, worldwide economic collapse and perhaps the worst depression since the 1930s. The U.S. economy, as measured by earnings in the investment bank and commercial banking sector, appears to be red-hot.
On Wednesday, JPMorgan (JPM-NYSE), Goldman Sachs (GS-NYSE) and even Wells Fargo (WFC-NYSE) either beat or smashed 3rd quarter earnings expectations.
For example, the earnings estimates for JP Morgan, as tracked by Zacks Investment Research analysts, expected EPS to nearly triple to $3.05 from the same quarter last year, on revenue of $30.07 billion, a 6.4% increase. Yet, JPMorgan’s earnings actually soared 477% to $4.50 a share. Meanwhile, revenue climbed to $33.12 billion. This resulted in an earnings boost for JPMorgan that could release $5.2 billion from credit loss reserves. This money can now be used to generate and fund new business in the 4th quarter and beyond.
While JP Morgan’s consumer banking revenues fell 10% to $6.7 billion, it was more than made up by investment banking revenues which more than tripled to $2.9 billion. Even fixed-income trading revenue grew, coming in with an increase of 15% to $5.8 billion. The rising equity market also contributed to the upside earnings surprise for the 3rd quarter. Equities trading for the investment bank helped fuel a revenue jump of 47% to $3.3 billion. Meanwhile, the commercial banking division saw and revenue increases, rising 11% to $2.4 billion. Even JP Morgan’s asset management revenue swelled 20% to $4.1 billion. JP Morgan’s CEO Jamie Dimon said in a statement Wednesday…
“With all of the stimulus spending, potential infrastructure spending, continued Quantitative Easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth.”
One cautionary note from JP Morgan’s CEO Jamie Dimon came last week in a letter to shareholders. He cautioned that big banks face a major threat from fintech rivals, as banks play a more minor role in the financial system.
Jamie Dimon also asserted in his letter to shareholders that stock market valuations are “quite high” thanks to excess savings making it into equities. Dimon was, however, optimistic and said he expects the U.S. economy to boom into 2023 while cautioning more challenging times to lay ahead.
Over at Goldman Sachs, analysts Zacks following Goldman Sachs’s earnings, expected its earnings to more than double to $9.79 on sales of $11.5 billion, a 31.5% jump year over year. However, earnings per share EPS ballooned to $18.60 a share on revenue of $17.7 billion.
Goldman’s Investment banking revenue skyrocketed 73% to $3.77 billion, while fixed-income trading revenue jumped 31% to $3.89 billion, and equities trading revenue surged 68% to $3.69 billion. The international investment bank also enjoyed a boom in asset management revenue, which jumped to $4.61 billion vs. a negative $96 million a year ago. Even Goldman’s wealth management division saw its revenue grow 16% to $1.74 billion.
Like JP Morgan, the better than expected quarter allowed it to retain $70 million set aside for credit losses. The investment bank set aside $937 million a year ago for possible credit losses. Those kinds of losses just are not materializing,
Goldman Sachs announced during its earnings call that it plans to expand its services for private wealth clients giving them access to Bitcoin and other digital assets.
Analysts expected Wells Fargo to post EPS of 69 cents vs. 1 cent a year ago and expected sales to slip 0.6% to $17.62 billion. Yet, the banking giant could come in with EPS of $1.05 on revenue of $18.06 billion. As a result of the improving economy, provision for credit losses much less than expected; $5.1 billion.
However, Wells Fargo’s consumer banking revenue was flat at $8.65 billion, still better than expected. The national banking institution’s commercial banking revenue, however, fell 12% to $2.2 billion. In comparison, its Corporate and investment banking division grew revenue by 7% to $3.6 billion and its wealth management division revenue rose 8% to $3.5 billion.
The Fed’s holding steady on interest rates will give the banking sector room to beat earnings expectations going forward.
Federal Reserve Chairman Jerome Powell’s recent statement during his CBS 60 Minutes interview last week said… he doesn’t expect any interest rate hikes will help the U.S. economy through the rest of the year and possibly through 2022. But it could fuel further upside earnings surprises. Powell said inflation would have to average around 2% before raising rates.
Lower borrowing rates will likely help the economic recovery underway. Still, they will continue to concern economists who worry that as the U.S. economy bounces back, inflation fears will continue to grow. This is already impacting bond prices by driving them lower and yields higher. Geoff Garbacz, the editor of Gold and Energy Options Trader, says…
“Higher bond yields benefit banks because they lend on the long end of the yield and borrow on the short end.”
Here’s how earnings from JPMorgan, Goldman, and Wells Fargo compare