It was surprising to see the Financial sector (XLF) with expected EPS growth for Q1 ’23 of 5.2% on expected revenue growth of 9%, especially given all the events around the banks in the last 4 weeks.
To dig into the recent history and provide a little context, here’s how the financial sector performed in 2022 in terms of quarterly EPS and revenue growth:
- Q1 ’22: EPS declined -17.1% on revenue growth of +2%;
- Q2 ’22: EPS declined -19.3% on a revenue decline of -1.2%;
- Q3 ’22: EPS declined -16.4% on revenue growth of +7.8%;
- Q4 ’22: EPS declined -8.9% on revenue growth of 6.6%;
There is a couple of stories in here that informed readers are probably well aware: with Jamie Dimon’s “economic hurricane” comments and the many calls for a recession, credit loss reserves for the big banks like JP Morgan, Bank of America (NYSE:BAC), and a host of others were increased sharply which was a trend that started in late 2021.
Remember, the worry at this time last year and through March of ’23 was that “credit losses” and a bad recession were just around the corner. Jamie Dimon even said at one point last year a 6% unemployment rate would likely lead to an increase in loan loss reserves of $6 billion or more, so that was all being built into the EPS estimates for 2022.
The other issue – and both the credit loss issue and capital markets issue – was the capital markets issue, particularly for (again) JP Morgan, Bank of America, Goldman Sachs (NYSE:GS), etc. was that the corporate and investment banks were printing money in late 2020 and all of 2021 (about an 18-month period). Then when Jay Powell started making cautionary statements about inflation and interest rates in late 2021, and Treasury yields started to rise, bond market issuance and IPO activity screeched to a halt.
Just as an example, JP Morgan, without showing readers the actual numbers, has a Corporate & Investment Bank segment that was 40% of total net revenue in late 2020 and through 2021 and more than that percentage of operating profit, with the operating profit of that C&I Bank falling more than 20% y.y in every quarter of 2022.
The point is that – while the regional banks are going to get a LOT of scrutiny with the Q1 ’23 earnings releases – the bigger banks should be fine as long as a worse-than-expected recession is avoided, and capital market activity returns to normal.
Conclusion
The big banks like JPM, GS, MS, BAC, usually report the same time every quarter, and that would be between April 12th and April 14th, the week after next. This blog will dig deeper into the numbers before the earnings releases.
The issues are going to be entirely different for financials than they were a year ago, where regional banks probably fared pretty well, and the big mega-banks were hit on capital markets drying up.
The big banks can still benefit as interest rates stabilize (or – dare say it – fall), and capital market activity and issuance return. Mortgage fees can be a big part of a bank’s fee-based business, so that will be an easier comparison than 2022.
No regional bank exposure is owned, other than some SPDR® S&P Regional Banking ETF (NYSE:KRE), and it’s a small position.
It’s just an opinion but a lower fed funds rate and a return to a normally-shaped yield curve, might relieve some of this stress of unrealized losses on the held-to-maturity bond positions.
JP Morgan traded up to an all-time-high in $172 – $173 in late 2021, and at it’s current price of $130, I still think it’s $20 – $30 too cheap. Still, the C&IB segment of the bank needs operating profit to stop declining 20% y.y, which I believe it will in Q1 ’23 and into 2023 since there are far easier compares for the unit this coming year.
Take all this with a grain of salt and a healthy skepticism. Past performance is no guarantee of future results, and all information put forth here is simply one opinion, and opinions – like capital markets – can change quickly. None of this information may be updated, and if it is, it may not be updated in a timely fashion.