{"id":14678,"date":"2023-10-09T08:12:28","date_gmt":"2023-10-09T14:12:28","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=14678"},"modified":"2023-10-09T08:12:28","modified_gmt":"2023-10-09T14:12:28","slug":"earnings-previews-of-big-financials-reporting-friday-october-13th-2023","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=14678","title":{"rendered":"Earnings Previews of Big Financials Reporting Friday, October 13th, 2023"},"content":{"rendered":"<p>In yesterday&#8217;s (Saturday, October 7, 2023) <a href=\"https:\/\/fundamentalis.com\/?p=14669\">blog post<\/a>, the names of companies that were reporting this coming week that might have some interesting commentary, were posted for readers.<\/p>\n<p>Today, we&#8217;ll look at the bank \/ financial companies in which client&#8217;s have an interest or might have an interest, and look at valuation and expectations coming into the Q3 &#8217;23 earnings releases. First, let&#8217;s have a look at the financial sector in general and historical revenue and EPS growth.<\/p>\n<p>Financials represent 12.7% of the SP 500&#8217;s market cap as of October 6th, 2023, but likely represents a larger &#8220;earnings weight&#8221; within the SP 500, although the exact percentage is unknown.<\/p>\n<p><em><strong>Financial sector revenue and EPS growth:<\/strong><\/em><\/p>\n<ul>\n<li>Q3 &#8217;24: +9.9% EPS grow estimated (no sector rev gro estimate available)<\/li>\n<li>Q2 &#8217;24: +6% EPS gro estimated, (no sector rev gro estimate available)<\/li>\n<li>Q1 &#8217;24: +4.7% EPS gro estimated, (no sector rev gro estimate available)<\/li>\n<li>Q4 &#8217;23: +5.6% rev gro, +10.8% EPS gro (estimated)<\/li>\n<li>Q3 &#8217;23: +2.3% rev gro, +11.3% EPS gro (estimated)<\/li>\n<li>Q2 &#8217;23: 11% rev gro, and 9% EPS gro (actual)<\/li>\n<li>Q1 &#8217;23: 10.8%, +7.7% (actual)<\/li>\n<li>Q4 &#8217;22: +6.6%, -8.9% (actual)<\/li>\n<li>Q3 &#8217;22: +7.8%, -16.3% (actual)<\/li>\n<li>Q2 &#8217;22: -1.6%, -19.3% (actual)<\/li>\n<li>Q1 &#8217;22: -2.2, -17.1% (actual)<\/li>\n<li>Q4 &#8217;21: -4.0%, +9.9% (actual)<\/li>\n<li>Q3 &#8217;21: +4%, 35.9% (actual)<\/li>\n<li>Q2 &#8217;21: +6%, +158% (actual)<\/li>\n<li>Q1 &#8217;21: +33.2%, +138% (actual)<\/li>\n<li>Q4 20: +3.3%, +20.4% (actual)<\/li>\n<li>Q3 &#8217;20: +3.9%, -2.8% (actual)<\/li>\n<li>Q2 &#8217;20: +5.9%, -46.7% (actual)<\/li>\n<li>Q1 &#8217;20: -19.8%, -37.8% (actual)<\/li>\n<li>Q4 &#8217;19: +23.8%, +10.2% (actual)<\/li>\n<li>Q3 &#8217;19: +2.6%, +2.6% (actual)<\/li>\n<li>Q2 &#8217;19: +3.5%,+10% (actual)<\/li>\n<li>Q1 &#8217;19: +10.1%, +8% (actual)<\/li>\n<li>Data Source: IBES data by Refinitiv<\/li>\n<\/ul>\n<p>Because the loan-loss provision for banks and major financials (that extend mortgage or personal credit) expand and contract like an accordion, banks are typically valued on a &#8220;pre-tax, pre-provision&#8221; profit basis. However, because of the increase in interest rates since early 2022, the analytical game has changed in terms of assessing risk for banks and financials, since it&#8217;s now more than just credit risk, as was discovered with Silicon Valley Bank (SVB).<\/p>\n<p>Looking at the above data, financials have generated decent revenue growth in the first two quarters of 2023, probably on net interest revenue increases for the first time in a decade, however, looking at the above history COVID and the pandemic just wreaked havoc on the sector with the loan-loss provisions, then the loan-loss recoveries, and then increased loan-loss reserves again in early 2022 on the recession that never happened from the Wall Street firms that got it all wrong.<\/p>\n<p>Both corporate and consumer credit have held up quite well despite all the negative prognostications the last two years. It&#8217;s the interest rate risk and the inverted yield curve that&#8217;s now causing problems, but the big banks are still probably the safest best in a tough-performing sector.<\/p>\n<p>Let&#8217;s get at it by bank \/ financial company:<\/p>\n<p><em><strong>JP Morgan (JPM): <\/strong><\/em>JP Morgan is scheduled to report Friday morning, October 13th, before the opening bell, and consensus expectations as of today (October 8, &#8217;23) are looking for revenue of $39.54 billion and expected EPS of $3.89 for year-over-year (y.y) growth of 21% and 29% respectively. Full year, 2023 &#8220;expected&#8221; EPS and revenue growth for the banking giant &#8211; as it stands today pre Q3 &#8217;23 earnings &#8211; is +23% and +34% respectively, up sharply from consensus estimates stood in early January &#8217;23. Last year, in 2022, JPM grew revenue and EPS by 7% and -22% respectively, so readers can see the bank is looking at much stronger results in &#8217;23, although the stock is still trading heavy given the market action around financials.<\/p>\n<p>The three year &#8220;expected&#8221; average revenue and EPS growth for JPM today, is 7% and 11% respectively. With the stock trading at an average of 9x EPS today, it&#8217;s still too cheap in my opinion.<\/p>\n<p>When you look at this blog previous financial sector and JPM earnings previews, the &#8220;delta&#8221; to JPM EPS is the &#8220;corporate and investment bank&#8221; or what&#8217;s really the capital market operations, and in Q2 &#8217;23, the CIB (as it&#8217;s called) was roughly 30% of both JPM&#8217;s net revenue and net income and in Q2 &#8217;23, and it grew revenue and profits y.y 5% and 10% respectively after 4 straight quarters of negative growth in calendar &#8217;22.<\/p>\n<p>With the return of the IPO market and if and when the 10-year Treasury might peak, resulting in a return of corporate bond underwriting, it could help JPM&#8217;s overall results.<\/p>\n<p><em><strong>Summary \/ conclusion:\u00a0 <\/strong><\/em>In &#8220;normal times&#8221; if there is any such a macro environment, particularly with what happened in Israel over the weekend, JP Morgan is worth $180 &#8211; $200, since I think it can earn $18 &#8211; $20 per share, even with no multiple expansion, but eventually the bond market has to normalize. It&#8217;s a guess on my part but the acquisition of First Republic after the Silicon Valley Bank collapse, which was heavily accretive to JPM, might still have additional &#8220;accretion&#8221; left as JPM integrates the bank into operations. In addition, JPM has not increased their dividend for 8 quarters (going on 9 quarters if the dividend isn&#8217;t boosted in October &#8217;23), and repurchases have not been as robust as they have been historically.<\/p>\n<p>Given current consensus forecasts, here&#8217;s the next 3 full-year expected EPS for JPM:<\/p>\n<ul>\n<li>2025: $15.75 (est)<\/li>\n<li>2024: $14.83 (est)<\/li>\n<li>2023: $16.08 (est)<\/li>\n<\/ul>\n<p>In December, 2022, the 2023 full-year consensus estimate was $12.93 versus today&#8217;s $16.08, so investors have seen substantial positive revisions to JPM EPS in 2023 already.<\/p>\n<p>Both the EPS and revenue revisions for JPM over the last year, remain firmly positive.<\/p>\n<p>Stay with JP Morgan, it&#8217;s the best of the best in terms of the big banks. (JPM has been a top 10 client position since post 2008.)<\/p>\n<p><em><strong>Citigroup:<\/strong><\/em> (C): Citigroup is also expected to report their Q3 &#8217;23 quarterly results before the opening bell on Friday, October 13th, 2023. Analyst consensus is looking for $19.26 billion in revenue and $1.19 in EPS for expected y.y growth of 4% and -21% respectively.<\/p>\n<p>If we look at expected 3-year EPS and revenue growth, the rate of growth for both is expected to average just 2% for each (revenue and EPS) through 2025. (That&#8217;s pretty poor relative to it&#8217;s peers.) The stock is trading at a 6x &#8211; 7x multiple at $40 per share.<\/p>\n<p>Here&#8217;s the issue: all the smart value investors like Bill Nygren at Oakmark and Warren Buffet at Berkshire Hathaway point to Citi&#8217;s book value of $98 per share and tangible book value of $89 per share say, &#8220;well, the stock&#8217;s too cheap at 0.4x book and 0.47x tangible book value trading at $40 per share&#8221; and they are right.<\/p>\n<p>The problem is (as i see it) is that Citi&#8217;s ROE is horrid, at 7% &#8211; 9% annually versus JP Morgan&#8217;s return-on-tangible common-equity (ROTCE) of 15% &#8211; 17% and Bank of America&#8217;s 12% &#8211; 13% ROTCE target.<\/p>\n<p>It isn&#8217;t that Citi isn&#8217;t too cheap at 0.4x &#8211; 0.5x book value &#8211; it&#8217;s that the assets they do have are not generating a sufficient return on equity relative to it&#8217;s peers and really relative to anything financial.<\/p>\n<p>Jane Fraser, Citigroup&#8217;s CEO, has been saying for 18 months that expense and cost reductions are coming, and this was reiterated again recently,\u00a0 but we&#8217;ll see if it&#8217;s enough to boost ROE and thus &#8211; hopefully &#8211; boost the stock price.<\/p>\n<p><em><strong>C Summary:<\/strong><\/em> Citigroup at $40 per share is at the low end of it&#8217;s 7-year trading range reaching back to 2016. The stock is probably a lower-risk purchase here &#8211; even in front of earnings with it&#8217;s current 5% dividend yield &#8211; but Jane Fraser has to make a forceful statement with whatever Citigroup is contemplating in terms of cost reduction, and hopefully it will translate into higher ROE. No question that &#8211; on a valuation basis &#8211; the stock is cheap. (Clients are long a small portfolio weight in Citi, and I&#8217;d like to add more.)<\/p>\n<p><em><strong>Charles Schwab (SCHW):<\/strong><\/em> &#8220;Chuck&#8221; isn&#8217;t supposed to report until early next week, but it&#8217;s client 2nd or 3rd largest financial holding, and with the stock down -37% as of Friday, October 6th, it&#8217;s one of 2023&#8217;s largest underperformers relative to the SP 500 YTD.<\/p>\n<p>Simply, the yield curve is killing Chuck, with fed funds at 5.5% and their income-generating assets at a much lower rate. The big news from Q2 &#8217;23 earnings was that Schwab saw cash-sorting slow, and Schwab&#8217;s reliance on short-term funding was diminished, and the stock rallied about 10% &#8211; 12% following the Q2 &#8217;23 earnings report. That being said, a lower effective tax rate added to the EPS upside in Q2 &#8217;23 and thus lowered the quality of the earnings beat.<\/p>\n<p>Today, the multiple has contracted significantly on Schwab&#8217;s stock, down from 20x in the 2nd quarter to 16x today, as both EPS and revenue expectations for Schwab, continue to be revised lower for the asset-gathering giant.<\/p>\n<p>It&#8217;s not a great environment for Chuck or shareholders, as contracting NIM (net interest margin) and weaker stock and much weaker bond markets is compressing Schwab&#8217;s operating margin. In Q2 &#8217;23, Schwab&#8217;s NIM contracted to 1.87%, and faces tougher comp&#8217;s on NIM until Q2 &#8217;24.<\/p>\n<p>The offset to that is that Schwab has always been rigorous about expense control and as NIM compresses, Schwab management can help offset the pressure with operating expense discipline.<\/p>\n<p>Schwab put in a series of trading lows near $47 &#8211; $48 in April &#8211; May &#8217;23 around the Silicon Valley Bank collapse. Schwab continues to be a top 10 client position even with the drop this year, thus only small positions may be added (if any) in the low $50&#8217;s as the plan is to see what Q3 &#8217;23 earnings look like. With the Fed likely being done as inflation abates, a calmer yield curve, even if a normal slope doesn&#8217;t return for a while, will help.<\/p>\n<p>Still, Schwab&#8217;s model would operate best with a normally-sloped yield curve and a &#8220;normal&#8221; fed funds rate closer to 2% &#8211; 3%.<\/p>\n<p>Consensus estimates for the next 3 years reflect expected growth for SCHW of 12% in EPS and 6% in revenue, so with a 16x multiple, the stock now incorporates the slowing growth, although the question remains what&#8217;s in store for the bond markets and yield curve in 2024.<\/p>\n<p>Schwab has been a sporadic share repurchaser, but has boosted the dividend nicely the last few years, so SCHW in the low $50&#8217;s is yielding almost 2%, not bond-like, but much higher than the last 13 year average.<\/p>\n<p>Be patient, this stock and bond market environment is challenging the low-cost (former) discount broker, even as new new asset growth continues in the mid-single-digit range.<\/p>\n<p><em><strong>Summary \/ conclusion:<\/strong><\/em> Financials are typically a value sector and even more so this year given the underperformance relative to the SP 500&#8217;s YTD return. However there is value in the big banks that are more insulated from the yield curve inversion, unlike the regional banks, which are more exposed to the strict &#8220;lend at 6%, borrow at 3%&#8221; spread capture.<\/p>\n<p>Readers might favor the more market-sensitive names like the brokers and the bigger banks, particularly if a Q4 &#8217;23 rally happens in the SP 500. Investors are approaching the best 3-month period of SP 500 returns with October, November, and December upon us. Until the yield curve changes, regional banks are still probably a tough long until something changes with the short end of the yield curve.<\/p>\n<p><em><strong>YTD trailing-returns<\/strong><\/em> for above names:<\/p>\n<ul>\n<li><em><strong>JPM:<\/strong><\/em> +11.22%<\/li>\n<li><em><strong>C:<\/strong><\/em> -6.88%<\/li>\n<li><em><strong>SCHW:<\/strong><\/em> -37.22%<\/li>\n<li><em><strong>SPY:<\/strong> <\/em>+13.58%<\/li>\n<\/ul>\n<p>None of this is advice. Past performance is no guarantee of future results.<\/p>\n<p>Thanks for reading.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In yesterday&#8217;s (Saturday, October 7, 2023) blog post, the names of companies that were reporting this coming week that might&hellip;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[278,84,27,36],"tags":[],"class_list":["post-14678","post","type-post","status-publish","format-standard","hentry","category-c","category-financial-sector","category-jpm","category-schw"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/14678","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=14678"}],"version-history":[{"count":10,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/14678\/revisions"}],"predecessor-version":[{"id":14692,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/14678\/revisions\/14692"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=14678"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=14678"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=14678"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}