Banks are still in 'uncertain environment' following earnings: Analyst

Wells Fargo, JPMorgan, and Citigroup all reported second quarter earnings. RW Baird Analyst David George joins the On the Move panel to break down the results.

Video Transcript

- We want to take a look at what happened with bank earnings this morning. We're going to start with JPMorgan Chase. They reported revenue of $33 billion in the second quarter. That beat estimates, as trading revenue surged 79%, a record 9.7 billion, a lot of it bond trading, which generated 7.3 billion. Earnings were 4.69 billion. Jamie Dimon says, quote, "we still face much uncertainty regarding the future path of the economy." And they set aside $10.5 billion in loan loss reserves. Julie?

- I'm taking a look at Citigroup. Those shares are down about 2.3% right now. As you mentioned, Citigroup beat on the top and bottom line. And it's a sort of similar story to JPMorgan, in that the company did better on the investment banking and trading side, and not as well on the consumer side. So that could be what is partially responsible. Revenue in its consumer banking operation down 10% year over year, net credit losses up 12% year over year. So that, obviously, is a continuing concern. One of the big questions is whether this is the low point for Citigroup and some of the other banks, Adam.

- And then there was Wells Fargo, which reported a loss of $2.4 billion. Revenue missed estimates. That came in at 17.8 billion. They cut the dividend, which was expected, but this was far deeper than people thought. $0.10 per share. It had been $0.51. They've set aside $8.4 billion in loan loss reserves. CEO Charles Scharf says, "our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter."

Let's break all of this down with someone who follows the banks very closely. David George, who is an analyst at Baird, is joining us right now on the telephone. Remember to unmute, please, David. And what's the headline you think we should take as investors from these bank earnings?

DAVID GEORGE: I would say the headline is we continue to be in a very uncertain environment, but a number of companies, JPMorgan, as an example, have still got significant earnings power to weather this difficult environment, and the expectations are relatively low given fairly cheap valuations for these bank stocks.

- David, it's Julie here. I want to ask about sort of how long the tail is, if you will, when it comes to nonperforming loans and credit risk, because people have been getting those stimulus checks, but a lot of people are out of work. The stimulus checks are about to end. So even though there's this talk about how-- is the worst behind us, I wonder if that is true for loans and credit, since people might still continue to have difficulties paying off their debt as the year goes on.

DAVID GEORGE: Yeah, that's a fair concern. You know, the interesting thing is the actual credit-- the credit data has looked fine, I would say probably better than it would normally be kind of in a mid-cycle basis. And that reflects, Julie, I think what you described, is there's been a ton of stimulus and various programs for loan forbearance and so on and so forth, which have helped the numbers.

Now, something that's new in 2020 is banks, in a provision called C-E-C-L, or CECL, are now providing estimated full-cycle credit losses on a quarterly basis, which has resulted in more volatility in the earnings, as well as very high provision. So while credit will probably get worse, the earnings impact from that is largely being felt today. So while credit will inevitably get a little worse from here, the vast majority of the earnings hit we think has been already absorbed, most notably in this quarter today.

BRIAN CHEUNG: David, it's Brian Cheung here. So something that I've been interested in is just the way that big banks have been taking this COVID-19 related crisis to the chin, a lot of these big banks relying on other sources of revenue, like their trading desks, whether that's in fixed income or in equity or other types of investment banking, underwriting, to compensate for the losses to squeeze out some profit on the bottom line.

But for a lot of these regional banks, right, or large superregional banks, they might not have those desks that Morgan Stanley, Goldman Sachs, that JPMorgan Chase have. What is the big story going to be as we head deeper into bank earnings season, and start to look at slightly smaller, but still large publicly traded banks, like your [INAUDIBLE] like your M&Ts of the world?

DAVID GEORGE: Yeah, that's a good question. You're right, the-- most of your regional banks that are just in the kind of the basic business of making loans and taking deposits, those results are going to be a little more challenging just on a kind of a headline basis. I would imagine you'll see a number of banks break even or perhaps even lose a little bit of money on a GAAP basis, largely because of the elevated provisions pertaining to the CECL legislation that I mentioned earlier.

So those results will be a little more mixed, but from our perspective, given the valuations-- many of these stocks are trading at 0.7, 0.8, 0.9 times tangible book value-- we think expectations are generally pretty low. And this is probably the worst of the bank earnings for this cycle here in the second quarter, in our opinion.

- I want to ask you, as well, specifically about Wells Fargo, because this is a company that obviously had a bad quarter, but it's also a company that has had perennial issues, as we know, some of them because of the constraints put on it by the government. But is there any reason for an investor to own Wells Fargo here, because just when you think things are getting better, you tend to see bad-- more bad news come for this company?

DAVID GEORGE: Yeah, well, as you said, Julie, clearly Wells has had a lot of fundamental challenges. And we actually think that the stock is starting to set up to be a pretty compelling opportunity. Now, as you know, obviously good companies and good stocks aren't always one and the same, and we think Wells, while being challenged by a lot of the oversight and asset cap-related issues, I think longer term, there's a pretty good opportunity with this franchise. There's a, we think, a bloated expense base that's largely due to some of the legal and regulatory related costs, first of all.

And then second, their revenues have been pressured because they haven't been able to grow. So the-- both of those kind of collectively have had a significant impact on the earnings potential at Wells. And most of the bad news, we think, is out. The dividend cut, obviously, was announced this morning, as well. So there, everyone's talking about the things that can go wrong at Wells, and I think, at these valuations-- Wells Fargo is trading at 0.7 times tangible book, and while still-- with a trillion and a half of deposits, it's still a very formidable franchise, we think, longer term. So from our perspective, I think there's actually a potentially constructive opportunity developing here with Wells here.

- Well, we've still got Goldman Sachs and Morgan Stanley on deck, but we say thank you right now to David George, who is an analyst at Baird. All the best to you.

DAVID GEORGE: Thank you.