We're now well into second-quarter earnings season, and most big U.S. banks have reported their results. Since we have the latest numbers, it seems like a good time to ask some of our financial sector contributors what they have their eyes on. Here's why they are watching Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Wells Fargo (NYSE:WFC).
Look beyond the headline numbers
Matt Frankel, CFP (Bank of America): On the surface, Bank of America's second-quarter earnings might not look too great. The bank narrowly beat earnings expectations and matched on revenue, while some of its peers handily beat experts' projections on both the top and bottom lines. Plus, Bank of America's net interest margin fell significantly further than investors had hoped for.
However, if you look beyond the headline numbers and margin pressure, you'll see that Bank of America's business is firing on all cylinders. For example, a return on equity of 11.6% and return on assets of 1.23% is a big improvement for the bank over last year's numbers and makes it one of the most profitable of the big U.S. banks. The same can be said for Bank of America's 57% efficiency ratio, which is the result of some highly effective cost cutting by management at the same time the bank is leading the charge to provide employees with higher wages.
What's more, Bank of America's consumer banking business is growing much faster than that of its peers. Bank of America's loan portfolio has grown by 4% over the past year, twice as fast as the next best growth rate of the "big four" -- JPMorgan Chase's 2% year-over-year loan growth.
The takeaway is that although interest margin is under pressure, Bank of America continues to improve its efficiency and profitability and is doing a great job of growing its consumer banking business faster than the competition. So, while interest rate fluctuations may pressure earnings in the short term, Bank of America is setting itself up well for long-term success.
Wall Street's most prestigious bank gets back to its roots
Matthew Cochrane (Goldman Sachs): Marcus Goldman came to America as a young Jewish boy from Germany in 1849. He soon began lending money to small businesses on the streets of Philadelphia, taking a genuine interest in these entrepreneurs' well-being, coming beside them more as a partner than a predatory loan shark. And thus, 150 years ago, Goldman Sachs was born. Today, as one of the world's largest investment banks, it evokes thoughts of corruption and elitism as easily as it does prestige and trust.
To be sure, the bank has not avoided its share of trouble and controversy. During the financial crisis 10 years ago, the investment bank was the punching bag of late-night talk-show jokes and political cartoons alike. More recently, Goldman Sachs helped Malaysia establish a bond fund only to watch $4.5 billion to go missing. While it does not appear Goldman Sachs is responsible for the multibillion-dollar theft, legal issues are ongoing.
It is this kind of negative sentiment, though, that often creates opportunity for savvy investors willing to be patient. Even after the stock's almost 30% rise year to date, shares trade at an exceedingly attractive valuation, sporting a P/E ratio of just 9.0. The investment bank side of the business continues to chug along, supervising $1.66 trillion in assets and maintaining leading market share in key categories such as mergers and acquisitions and stock offerings.
Yet the reason to be most excited about Goldman Sachs might be its new Marcus by Goldman Sachs division, named for its founder. The name is more than honorary, as it indicates the bank's willingness to again serve individual banking needs, not just institutions. The direct bank offers savings vehicles such as CDs and high-yield savings accounts as well as personal loans. Coupled with its partnership with Apple to launch a new credit card, there are several reasons to believe Goldman Sachs might be vastly expanding its potential customer base with new products and services in the coming years.
Picking the underdog
Dan Caplinger (Wells Fargo): Bank stocks have been in the news lately, and most of the biggest financial institutions in the country have seen their stocks perform extremely well so far in 2019. Yet even as other big banks have managed to shed their negative reputations from the financial crisis, Wells Fargo is still struggling under the weight of the post-crisis scandals that shook the California-based bank to the core. Even so, the bank's financial results have remained strong, creating good potential value for investors.
Wells Fargo's latest quarterly results provide a good example of what shareholders have had to deal with. On one hand, many of the bank's internal metrics have been rock-solid, including return on equity of more than 13%. That helped power earnings higher by more than 30% year over year.
However, Wells Fargo's also dealing with ongoing pressure. Because the Federal Reserve maintained its restrictions on asset growth after Wells Fargo personnel opened customer accounts without permission and made other missteps, loan and deposit growth has just about evaporated. Meanwhile, a tougher interest-rate environment led to narrower net interest margin, and rising charge-offs signaled a potential downturn in creditworthiness across the bank's customer base.
The bullish case for Wells Fargo is that its negatives could easily turn to positives in the future. If a new CEO can repair its reputation and get the Fed to take off the chains holding back its growth, then Wells Fargo could quickly get completely back in the game. If that happens, share-price gains look likely based on current valuations -- and the negative sentiment most investors seem to have about the stock.