Bank Earnings Preview- A Primer for JPM, C, and WFC

Banks are set to kick off the Q2 earnings season in earnest on Friday, with industry giants JP Morgan ($JPM(JPM)), Citigroup ($C(C)), and Wells Fargo ($WFC(WFC)) leading the charge. These earnings reports will provide a critical early read into the health of the economy, as investors closely monitor consumer spending habits across both commercial and residential sectors. Key metrics such as loan growth will offer insights into economic growth and demand, while the performance of credit cycles will be scrutinized for signs of rising delinquencies in response to high interest rates. The financial sector, which has seen a year-to-date rise of 10%, has been the third best performer, trailing behind the Technology sector's 30% increase and the 26% gain in Communication Services.

As these major financial institutions report their results, market participants will be keenly watching for indicators that could influence broader economic sentiment and investment strategies. JP Morgan, Citigroup, and Wells Fargo's earnings will not only reflect their operational health but also provide a barometer for the financial sector's trajectory amid ongoing economic challenges. The focus will be on how these banks navigate the current economic landscape, manage credit risks, and leverage growth opportunities, all of which will be crucial for maintaining investor confidence and driving future performance in the sector.

J.P. Morgan (JPM)

JPMorgan Chase is set to report its earnings on Friday, July 12, before the market opens. Analysts are anticipating earnings per share (EPS) of $4.20 and revenue of $42.08 billion for the quarter. As a bellwether for the banking industry, JPMorgan's performance is closely watched by investors and analysts alike, serving as a key indicator of the financial sector's health and offering critical insights into the global economy. The results and guidance provided by JPMorgan will be pivotal in assessing the broader economic landscape and the future direction of market trends.

JPM is a best-in-class name but it has been underperforming peers as of late due to its rich valuation. Still, it continues to produce some of the strongest results in the industry under the tutelage of bank icon Jamie Dimon.

During JPMorgan Chase's annual investor day held at its headquarters in New York City, the management team reiterated the strengths of its diversified and global business model, emphasizing its capacity to deliver strong returns through economic cycles. Despite mixed signals in the operating environment, the management provided positive near-term guidance on net interest income (NII), investment banking fees, and trading revenues. However, CEO Jamie Dimon expressed a cautiously pessimistic outlook on the broader economic landscape, echoing his comments from the Q1 earnings report, indicating macroeconomic uncertainties rather than company-specific concerns.

JPMorgan updated its guidance for 2024, forecasting core NII to increase by $2 billion to approximately $91 billion, and adjusting its expense forecast to about $92 billion, up from $91 billion due to a charitable contribution. The bank also expects the credit card net charge-off rate to be 3.4%, slightly lower than the previous estimate of 3.5%. The management reaffirmed their medium-term target of a 17% return on tangible common equity (ROTCE) and highlighted their confidence in the company's ability to navigate through regulatory capital uncertainties and maintain strong financial health.

Last month, JPMorgan's executive, Co-CEO of CIB Troy Rohrbaugh, provided positive guidance for the second quarter, indicating that investment banking revenue is expected to increase by 25%-30% year-over-year. Additionally, trading revenue for Q2 is trending slightly better than the previously anticipated mid-single-digit growth. This optimistic outlook underscores strong performance in the investment banking and trading segments.

Regarding share buybacks, Jamie Dimon indicated that JPMorgan is unlikely to increase stock repurchases significantly at current price levels, diverging from the recent pace of about $2 billion per quarter. The bank's CFO, Jeremy Barnum, noted that regulatory capital requirements remain uncertain. However, the management remains committed to investing in technology, projecting tech spending to rise to $17 billion in 2024, underlining its strategy to drive growth and operational efficiency through substantial technological investments.

JPMorgan Chase reported strong Q1 earnings, surpassing analyst expectations. The company posted an adjusted revenue of $42.55 billion, beating the estimated $41.64 billion, and earnings per share (EPS) of $4.44, exceeding the consensus of $4.17 and last year's $4.10. Net interest income (NII) rose 11% year-over-year to $23.2 billion. The bank's Q1 provisions for credit losses were $1.88 billion, significantly lower than the previous year's $2.28 billion. However, despite these positive results, the stock saw a premarket decline of 2-3%, attributed to cautious commentary about the economic outlook.

Key metrics revealed mixed performance in various segments. Trading revenue fell by 5% to $8 billion, with declines in fixed income, currency, and commodities (FICC) by 7%, while equities revenue remained flat. On a positive note, investment banking revenue surged 27% to $2 billion, driven by higher fees from debt and stock underwriting. JPMorgan's non-interest expenses were slightly lower than expected at $22.76 billion versus the estimated $22.99 billion. The bank reported a return on equity (ROE) of 17%, beating the expected 15.9%, and a return on tangible common equity (ROTCE) of 21%, above the anticipated 20%.

Looking forward, JPMorgan provided updated guidance for the full year. The bank expects firmwide net interest income to be around $90 billion, subject to market conditions. The bank's forecasted full-year adjusted expenses are about $92 billion, slightly higher than the previous forecast of $91 billion. CFO Jeremy Barnum noted significant uncertainties, including regulatory capital requirements and economic conditions. The bank also plans to increase its tech spending to $17 billion in 2024 and anticipates a lower net charge-off rate for credit cards at 3.4% compared to the earlier estimate of 3.5%.

Citigroup (C)

Citigroup is set to report its earnings on Friday, July 12, before the market opens, with analysts expecting an EPS of $1.39 and revenue of $20.08 billion. As a prominent turnaround story, Citigroup has been garnering investor interest due to its impressive performance relative to peers and its attractive valuation. The bank's strategic initiatives to improve efficiency and bolster its core businesses have led to significant progress, making it a compelling investment. With a focus on enhancing returns and addressing operational challenges, Citigroup's efforts are paying off, drawing investors who are enticed by its potential for continued growth and value creation.

Shares of C continue to trade at a discount to peers with a Price to Book Value of 0.67x. This has led to buyers flocking into the name with year-to-date gains of 29%.

Citigroup reported strong Q1 earnings, beating both top and bottom-line estimates. The company posted an EPS of $1.58, significantly higher than the consensus estimate of $1.11, although net income fell to $3.4 billion from $4.6 billion year-over-year. Revenue was down 2% year-over-year to $21.1 billion but still surpassed the estimated $18.78 billion. Despite the drop in income, the bank's results were bolstered by solid trading and investment banking revenues, with investment banking revenue coming in at $903 million, above the street's estimate of $776.9 million. However, trading revenue fell 7% to $5.4 billion, impacted by declines in fixed income and currencies.

Analyst reactions were generally positive following the earnings beat. Goldman Sachs raised its price target for Citigroup to $69 from $68 and maintained a Buy rating. They highlighted Citigroup's improving fundamentals and progress on its turnaround strategy. The analysts noted the unchanged guidance and the bank's focus on efficiency improvements. They were particularly impressed by Citigroup's ability to exceed earnings estimates and the positive trajectory for future revenue growth.

Market response to Citigroup's Q1 results was favorable, with shares rising 0.8% premarket. The company reiterated its full-year revenue guidance, expecting between $80 billion and $81 billion, and forecasted modest declines in net interest income excluding markets. Citigroup's CFO mentioned that the bank will continue to evaluate buybacks on a quarterly basis throughout 2024. Overall, the strong earnings report reinforced a positive outlook for Citigroup, driven by its solid investment banking performance and strategic initiatives aimed at improving efficiency and returns.

During Citigroup's recent investor day, the management team, led by CEO Jane Fraser and CFO Mark Mason, provided updated guidance and insights into the bank's strategic focus. Citigroup expects investment banking fees to rise by 50% year-over-year, reflecting strong performance in this segment. The bank's 2024 revenue forecast is set between $80 billion and $81 billion, with an expected annual revenue growth rate of 4-5% through 2026. Additionally, Citigroup aims for a mid-20s percent return on tangible common equity (ROTCE) by 2026, driven by significant growth in banking and stable deposit levels in its Treasury and Trade Solutions (TTS) unit. The bank also plans to enhance capital levels through ongoing divestitures and reduce expenses this year.

Analysts have positively received Citigroup's investor day presentations. Wells Fargo banking analyst Mike Mayo reiterated Citigroup as his top pick, with a price target of $85. Mayo praised the bank's detailed management strategies and their commitment to achieving high return targets, which are 10%-20% above consensus estimates. He described the investor day as validating, deliberate, and moats, highlighting the strength and competitiveness of Citigroup's Services Line of Business (LOB). Keefe, Bruyette & Woods increased their price target to $69 from $66, maintaining a hold-equivalent rating, while Goldman Sachs edged their target to $72, reinforcing a Buy rating and recognizing the bank's clearer growth path and potential for improved returns.

Overall, Citigroup's investor day underscored the bank's strategic initiatives and growth potential, with management reiterating their commitment to financial targets and operational improvements. The positive analyst reactions reflect confidence in Citigroup's ability to navigate economic uncertainties and deliver strong returns, bolstered by its diversified business model and robust service offerings.

Wells Fargo (WFC)

Wells Fargo is scheduled to report its Q2 earnings on Friday, July 12, before the market opens. Analysts are currently expecting the bank to post earnings per share (EPS) of $1.29 on revenue of $20.28 billion. This upcoming report is highly anticipated as Wells Fargo continues its efforts to turn around its business and demonstrate sustained financial improvements. The bank's strategic initiatives, including cost reductions, regulatory compliance improvements, and business streamlining, have been pivotal in restoring investor confidence. These measures have positioned Wells Fargo to potentially break above the critical $60 level, marking a significant milestone in its recovery and growth trajectory.

Investor sentiment has been positively influenced by these turnaround efforts, and the bank's stock performance reflects growing optimism. The potential to break above the $60 level signifies not only a technical achievement but also a symbolic victory in regaining market trust and stability. As Wells Fargo continues to execute its strategic plans, the upcoming Q2 earnings report will be crucial in validating its progress and setting the tone for future growth.

Wells Fargo reported its Q1 earnings, delivering mixed results relative to analyst expectations. The bank's earnings per share (EPS) came in at $1.20, surpassing the consensus estimate of $1.00 but falling slightly from $1.23 in the same quarter last year. Revenue for the quarter was $20.86 billion, exceeding the expected $20.21 billion. However, net interest income (NII) fell by 8% to $12.23 billion, missing the estimate of $12.32 billion. Despite these challenges, Wells Fargo maintained its guidance for a 7%-9% decline in NII for the full year 2024, indicating no changes from prior forecasts.

The bank's credit metrics showed some positive signs, with the provision for credit losses falling to $938 million, below the estimated $1.27 billion. The net interest margin (NIM) was 2.81%, slightly missing the forecast of 2.84%. CEO Charles Scharf noted that the consumer credit segment is performing as expected, while the wholesale credit continues to perform well. Additionally, the residential mortgage loan portfolio and most of the commercial real estate (CRE) portfolio are performing satisfactorily, although the institutional office loan portfolio is experiencing some stress.

Analysts responded positively to Wells Fargo's Q1 performance. Goldman Sachs modestly raised its estimates and maintained a Buy rating, citing the strong earnings beat and improving fundamentals. Evercore reiterated an Outperform rating with a $67 price target, highlighting the better-than-expected core EPS driven by higher non-interest income and lower provisions for credit losses. Analysts acknowledged the solid fee income growth in investment banking and trading, along with moderate improvements in credit trends, as key drivers for the stock's positive outlook. Overall, while the bank faces challenges with NII and expense management, its strategic initiatives and solid credit performance provide a strong foundation for future growth.