In this edition of Industry Focus, host Michael Douglass and Fool contributor Matt Frankel discuss third-quarter bank earnings. They were quite strong across the board, with one big exception.
A full transcript follows the video.
This video was recorded on Oct. 23, 2017.
Michael Douglass: Let's turn to specifics about the banks. Of course, Matt, you're a talker, I'm a talker -- we're going to need to get through this pretty quickly just so we don't bog down the entire episode. Let's just take a minute to look at each of these big banks, and how they got to their win or, in Wells Fargo's (NYSE:WFC) case, loss, compared to analysts' expectations. Starting with Morgan Stanley, wealth-management business seems to be doing really well. They have $2.3 trillion in assets under management. Lots of opportunity there in cross-selling other products to wealth-management clients. Think mortgages and other kinds of loans to further enhance the bank's profitability. I think they have a lot of really interesting opportunity from here.
Matt Frankel: They do. Both big investment banks have a lot of big opportunities, especially as they start to branch out into more traditional banking areas.
Douglass: One of the interesting trends that you'll see with banks right now is -- there is a lot of this -- you have your traditional investment banks. That's Morgan Stanley and Goldman Sachs. And they're kind of hopping into a lot of things that have not traditionally been in their purview. And you're seeing this in a lot of banks. There's this attempt to cross-sell and be a one-stop shop across the board for people and businesses in different stages. Certainly, with Goldman Sachs, they had a lot merger-and-acquisition fees. That's the other investment bank, by the way.
Frankel: Yeah, Goldman Sachs actually has the No. 1 market share in mergers and acquisitions. And IPOs, for that matter.
Douglass: Right. It's interesting. They are really focusing a lot of effort on consumer lending right now, with their Marcus online lending platform. I don't know about the rest of you, or you, Matt, but I get a lot of Marcus Loans advertisements on Facebook, so I'm certainly hyper-aware of that particular attempt by them.
Frankel: And it's been successful so far. They hit $1 billion in loans quicker than Lending Club or pretty much any of the other big players. And they have a big advantage in that they have tons of capital to lend. They don't have to wait for investors to put up money. They can grow it as quickly as possible.
Douglass: And speaking of having lots of capital, the Fed cleared them to raise their dividend next year. So that's good news for Goldman Sachs shareholders as well.
Let's hop on over to the commercial banks. Wells Fargo -- that's going to be the headline here. Not a great quarter by really just about any measure.
Frankel: Right. Like you said, revenue was pretty much up across the board except for Wells Fargo. Interest margins were up across the board except for Wells Fargo. Efficiency was up across the board except for Wells Fargo. I could keep going with that. But it was just all over the place. It was tough to find things to be happy about in this quarter for Wells Fargo.
Douglass: In a lot of ways, Wells Fargo is still struggling from the fake-accounts scandal last year and any number of other investigations and negotiations with the federal government over practices of various sorts. This is a lot to dig into there, more than we can in this episode. But a lot of concerns for Wells Fargo. I think that's reflected in relatively poor stock performance.
Frankel: One thing to point out with Wells Fargo, if you don't mind, is a lot of the negative results this quarter were also partly attributed to legal costs. It's not just their business that's suffering. It's, they're being hit with all kinds of fees and fines, and there's really no telling if there's going to be more at this point.
Douglass: Yeah. So a lot of uncertainty there right now. Let's turn to U.S. Bancorp (NYSE:USB).
Frankel: Sure. U.S. Bancorp is historically one of the most profitable banks in the country, especially for its size. And actually, for the past few years, it's been Wells Fargo, U.S. Bancorp, and then everyone else. Now it's just U.S. Bancorp and everybody else. Their return on equity, return on assets, which we're going to get into in a minute, is way above everybody else's. Same could be said for efficiency. Well, it's lower than everyone else's, but it's much better.
Douglass: Just across the board, when you look at the metrics, U.S. Bancorp looks like it's in a pretty darn strong spot. Let's turn to the universal banks. These are your traditional banks that really have been involved in a lot of different areas. They've had, if you will, their fingers in a lot of different pies. Let's start with Bank of America. Good news for Bank of America shareholders in that they've really done a good job of expense management. Their efficiency ratio is now down to just below 60%, which is a massive improvement from the Bank of America of the past.
Frankel: They're getting more efficient, not just because they're reducing their physical footprint. They're really doing a good job of pushing mobile and online banking. Mobile especially. A check deposit costs the bank something like one-tenth of what a deposit in a branch costed. So the more people they can get to use their online tools, their peer-to-peer payment solutions and stuff like that that are really starting to take off, the better off they'll be. And it's still a pretty small percentage of their transactions that are being done through mobile.
Douglass: Yeah, so there's a lot of opportunity to continue mitigating costs going forward with all these upfront investments they've made in technology.
Frankel: Yeah. They've probably done, in my opinion, the best job of the big banks in really leveraging their online platform.
Douglass: Sure. Let's turn over to Citigroup (NYSE:C). With Citigroup, two important things to point out. Efficiency ratio is down to 56%, which is sort of unheard of in the old Citigroup. So that's really good news, to see that they're doing a good job of expense management. And on the flip side, credit cards are showing more charge-offs. And that's, I think again, something that we're going to need to watch moving forward.
Frankel: Yeah. Citigroup is the only one of the big banks with a long way to go before their profitability is where it needs to be. They still have a relatively low return on equity for their shareholders.
Douglass: Yeah. And finally, JPMorgan (NYSE:JPM). So one of the interesting things about JPMorgan is, JP Morgan Chase, the Chase Sapphire Reserve card is beloved among credit card hackers. And management reports that it's finally starting to pay off for the bank. So this is a credit card with a lot of perks, and they're finally able to, they're attracting the sort of people they want to with those perks, and then are able to make money in other ways off that credit card. So that's good news.
Frankel: Yeah. Credit cards in general -- the Sapphire card was not very profitable at first, because they were pretty much giving away a sign on-bonus worth about $1,000. So it took them a long time before that was recouped by the increased business. But it looks like it's finally starting to pay off. A lot of people in the industry thought they were crazy for giving away, I think it was 100,000 frequent-flyer miles at first, something like that.
Douglass: Something like that, yeah. So it's good to see that working out. And wealth management is also paying off well for them, too, so that's good news.
Frankel: Definitely. They're doing a great job all around. There's really nothing negative to say about JPMorgan over the past few years.