While Goldman Sachs Group Inc. and JPMorgan Chase have turned in strong stock market performances in the past year, more gains could be on tap if the two megabanks provide any upside surprises in their coming profit reports.
and Wells Fargo & Co.
will deliver fourth-quarter earnings reports on Friday. Bank of America Corp.
and Goldman Sachs
report earnings on Jan. 18 and Morgan Stanley
provides its fourth-quarter update on Jan. 19.
Among the group, JPMorgan Chase is expected to earn $3.01 a share on $29.81 billion in revenue, according to analysts surveyed by FactSet. Wells Fargo’s targets are $1.11 a share in net income and $18.72 billion in revenue. Citigroup is expected to earn $1.43 a share on revenue of $16.85 billion.
Bank of America is on tap to report earnings of 76 cents a share on revenue of $22.19 billion; Goldman Sachs is expected to earn $11.80 a share on revenue of $12.02 billion and Morgan Stanley has an earnings target of $1.94 a share on revenue of $14.56 billion.
Wall Street analysts have theorized that rising interest rates will allow banks to increase their net interest margins on loans. With this sentiment creating wind at their back, shares of bank stocks have rallied, as investors placed bets that the continuation of the current economic recovery will benefit the largest financial players in the space.
Goldman Sachs shares are up nearly 47% in the past 12 months; JPMorgan has gained 31%; Wells Fargo is ahead by about 75% during the same period and Morgan Stanley has risen about 48%, along with a jump of 48% in shares of Bank of America. Citigroup is up about 5.5% in the past year as the laggard in the group.
Given the gains in bank stocks, investors looking for more reasons to wade into the sector may have reason to cheer a rise in loan activity in the fourth quarter over the third quarter as reported by the U.S. Federal Reserve.
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Industrywide, commercial and industrial (C&I) loans grew 6.3% quarter-over-quarter through Dec. 22, and total C&I-related loans also grew by 5.5% quarter-over-quarter. That’s close to the highest quarterly growth in the same period, according to Fed data.
“Banks should start 2022 on a good note because of a sharp surge in commercial and industrial (C&I) loan growth in late 4Q,” JPMorgan analyst Vivek Juneja said in a note to clients on Jan. 6. “We expect 4Q core results to be marked by a little better net interest income and strong investment banking, offsetting further normalization of trading and mortgage banking revenues and some further expense creep due to inflation and higher revenues.”
Juneja lifted his price target on Wells Fargo & Co. WFC, +2.44% to $57 a share from $53.50 and hiked Bank of America’s price target to $52.50 from $50. He cut his price target for Citigroup to $76 a share from $80.50.
Overall, analysts have been making more bullish calls on the big banks as they benefit from investment banking revenue and an expected jump in banker bonuses for 2021.
UBS analyst Erika Najarian on Dec. 10 upgraded Bank of America to buy from neutral and increased the bank’s price target to $64 a share from $37 a share.
UBS also boosted its view on JPMorgan Chase JPM, 0.28% to buy from neutral and increased its price target to $210 a share from $149 a share. It upgraded Wells Fargo & Co. to buy from neutral and bumped up the bank’s price target to $65 a share from $47. Citigroup C, 2.11% drew a downgrade to neutral from buy, with a lower price target of $67 a share, down from $98.
Najarian said she sees additional value in Bank of America because it’s “poised to be the secular winner of the coming economic and rate cycle, similar to how JPMorgan dominated the post-Global Financial Crisis recovery by outperforming on profitability.”
Kenneth Leon, research director at CFRA Research, said the U.S. economy is likely to be key driver to bank performance in 2022, with the omicron variant creating near-term uncertainty.
Fed interest rate hikes expected in 2022 will lead to wider spreads and net interest margins, and higher net interest income, he said. He rates Goldman Sachs as a strong buy and keeps buy ratings on Wells Fargo, Morgan Stanley and Bank of America; with sell ratings on Citigroup and JPMorgan Chase.
“We believe most diversified banks remain undervalued,” Leon said. “This observation is based on reviewing price to earnings multiples and price to net tangible book value ratios in the context of historical valuation metrics and relative to the S&P 500 index.”
Banks are expected to help shed light on the pace of the U.S. economic recovery and omicron variant impact, as well as consumer loan growth, which remains below pre-pandemic levels.
Risks to large bank stock performance include an unexpected geopolitical event triggering a recession; high unemployment, and a more risk adverse environment for investment banking and the capital markets, Leon said.
Uncertainties remain on the outlook for consumer and commercial loan activity in 2022, he said.
Looking at the broad banking sector, the KBW Bank Index ETF
is trading at about 62% of the S&P 500’s price-to-earnings ratio. Over the past 10 years, the index has traded for about 70% of the S&P 500’s price-to-earnings ratio.
Overall, analysts have been growing more bullish on earnings prospects for the coming quarter for both JPMorgan and Goldman Sachs, as the two big bank components of the Dow Jones Industrial Average.
Back in September, analysts expected fourth-quarter earnings of $10.09 a share for Goldman Sachs, according to FactSet. That consensus estimate increased to $11.67 a share on Dec. 31 and was revised upward to $11.75 a share on Jan. 7. JPMorgan’s earnings estimate increased from $2.85 a share in September to $8 as of Jan. 7.