In this week's episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, dive into earnings from JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Bank of America (NYSE:BAC) to look for the important points and trends investors need to know. And don't forget, earnings season is just getting started. Hear why Matt is keeping his eye on Live Oak Bancshares (NASDAQ:LOB) and Jason is watching Ameris Bancorp (NASDAQ:ABCB).
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This video was recorded on October 19, 2020.
Jason Moser: It's Monday, October 19th. I'm your host Jason Moser, and on this week's Financial show, we've got the biggest and baddest banks' earnings reviewed this side of the Mississippi. And thanks to technology, anyone on either side of the Mississippi can hear it. Joining me, to take us through it all, is my partner in crime, Certified Financial Planner, Matt Frankel. Matt, how is everything going?
Matt Frankel: Pretty good. That was the coolest intro to a show I've ever heard you do.
Moser: [laughs] You like that, huh! I mean, you know, you got to get creative; that's the fun part about doing these shows, you get a little bit of creative freedom to kind of go in there and do what you want, as long as it doesn't have to be bleeped out, right, that's the line.
Frankel: Exactly. That's something that's changed since we stopped doing them, you know, prerecorded. [laughs]
Moser: [laughs] Yeah, sometimes what happens in the studio, stays in the studio, and now it's all out there for everyone to see. But, ah! We digress. Matt, last week was a very big week, earnings-palooza kicked off, and as tradition is with every quarter, the big banks were the ones that really got us rolling here. We wanted to go ahead and devote today's show to actually taking a look back at five of the earnings reports that really stood out to us. We've got JPMorgan, we've got Wells Fargo, we've got Goldman Sachs, we've got Morgan Stanley, we've got Bank of America. And let's go ahead and kick it off with JPMorgan. This is a bank, Matt, and there's a lot to like about this bank. I think maybe what we like the most about it -- I think what I like the most about it, at least, is leadership. I think Jamie Dimon is certainly one of a kind. And I don't know about you, and I want to get your take on this, I don't know about you, but when I was reading through the call there was so much language in there that just leads me to believe that Jamie Dimon is taking such a broad approach to this point in time, this environment that the banks are dealing with the pandemic and whatnot, he is taking such a broad approach, JPMorgan is seemingly prepared for any and all outcomes regardless the scenario. Which, I mean, I'm not a shareholder, but if I were, I'd certainly be very encouraged. But I want to kick it to you, in regard to JPMorgan's earnings release, what were one or two of the things that stood out to you that this bank is doing really well.
Frankel: Well, first, you mentioned what Jamie Dimon said. I remember earlier in the year, kind of, similar to what you just said, during the height of the pandemic, they said they were in their own stress test, you remember that. You know, banks are required to run stress tests every year, the Federal Reserve requires it. They ran one day that was much more intense than what the Fed requires and still passed with flying colors. So, like you said, they are ready for anything. One thing that stood out to me that Jamie Dimon said this quarter, we've been talking a lot about brokerage consolidation in the past few weeks. And he said that JPMorgan Chase is very interested in acquisitions on the asset management front. So, I thought that was really interesting. So, we might see a lot more consolidation there.
But just getting to the numbers, JPMorgan Chase, they beat on the top- and bottom-line, which we don't pay that much attention to headline numbers, but it's interesting to know. If a stock moves one way or another that's usually why, and I mean, it kind of gives you the big picture of how the business is doing.
But digging in is a little bit more important. One reason JPMorgan is the most closely watched bank earnings report, it's not just because it's the biggest, it's because it's the first. Every earnings season they're the first of the big banks to report, I think, by like an hour. I think Citigroup was, like, an hour later. But even so, that's like, all eyes on JPMorgan to see how things are going.
Moser: You remember how it used to be based on Alcoa, it wasn't even that long ago, and Alcoa was what kicked this thing off. Talk about, like, who cares? I mean, I hate to throw nothing-burger out there, but it sure feels like Alcoa is just kind of a big nothing-burger these days.
Frankel: Right. I feel like for a long time they were famous because they kicked off earnings season.
Moser: [laughs] Yeah, I think you're right.
Frankel: But now it's pretty much JPMorgan Chase. So, they report, I think, 7:00 AM on earnings day. I think everyone else that reports, reports at 8:00.
But anyway, so the big thing the people were looking at was, how bad is the pandemic going to be on banks? And the way you've been able to tell that so far was how much they're setting aside to cover loan losses. Between the first and second quarters, for example, JPMorgan Chase set aside $15 billion or so in anticipation of loan losses, which if the COVID recession was really worse than expected, that might not have been enough, but it turns out that that was enough. Banks seem to be pumping the brakes on their loan loss reserves, and JPMorgan Chase actually released a little bit of reserves this quarter, instead of building it up, which is a really, really good sign. You know, they have pretty big investment banking operations, so, you know, trading tends to do better when the market is volatile, and that's exactly what we saw here. Bond trading revenue was up 30% year-over-year, their investment banking fee revenue was up double digits. So, the investment banking aspect of a lot of these banks we're going to talk about, including JPMorgan Chase, really kind of held them up in the face of a poor interest rate environment. You know, when interest rates are at rock-bottom levels, it's not exactly a great profit model for companies that loan money. But investment banking tends to do better during hard times, and that really helps balance out their second quarter results in terms of the losses in, like, interest margin, things like that.
Moser: Is there anything going on that gives you pause or something you feel like investors ought to be keeping their eyes on? I mean, this is really one of the best run banks out there, I think. So, this is kind of one that I put them in a little bit of a class of their own, but you know, nobody is perfect, I mean, there's got to be something out there that we want to be watching.
Frankel: Well, like you said, they're pretty much prepared for anything, but this could be a bad recession if things don't go well. If we don't get stimulus, for example. If the low interest environment continues to get worse, you know, mortgage rates plunge to, like, 1% or 2% from the current 3%, you know, that would be a problem. But what you want to keep an eye on really are the macroeconomic factors that govern bank profits. Like, I'm watching unemployment when I want to see how bad it's going to be for banks, and stimulus. I mean, the fact that they released some reserves is definitely a good sign, but you don't want to see that reverse course; it's really the number to keep an eye on.
Moser: Well, let's move over to Wells Fargo, this is the one that has, sort of, taken Bank of America's place as being, you know, the financial media's whipping post, so to speak. It just seems like they can't really do anything right. And, you know, this wasn't the greatest quarter in the world, I think we all kind of expected that, but then, of course, you have that whole PPP [Paycheck Protection Program] loan scandal, where you've got employees lying to obtain loans. It seems like it's just one thing after another. And a quote that came from the call basically said that their top priority continues to be the implementation of risk control and regulatory work. And I feel like that maybe is top priority 1A, and 1B, clearly, is the culture. I mean, there's stuff going on within this company that hasn't fully really been fixed yet. But let's go glass half-full here first. What about this quarter for Wells Fargo did you like?
Frankel: Well, to be fair, they are more closely scrutinized every other bank right now. So, you're going to find a lot more ...
Moser: It seems like they earned it, but go on... [laughs]
Frankel: Oh, they absolutely did. Like Buffett says, when you find a cockroach in the kitchen, there's usually not just one. So, now that they found the cockroach in the kitchen, which was the fake accounts scandal, now everything else they do is really scrutinized. And the latest thing was purely employees doing things on their own, it's worth mentioning. They didn't defraud anybody, it didn't affect any of Wells Fargo's customers, it was employees behaving badly.
Moser: Yeah. And it likely wasn't even really a faulty incentive structure. I mean, it seems like it really was, just like you said, I mean, just a few bad apples.
Frankel: Right. And because Wells Fargo is so scrutinized, they just kind of fell under the microscope. But this is a stock that trades for 60% of its book value, which is -- I mean, a while ago Wells Fargo, not a while ago, Wells Fargo was the most valuable bank stock by price-to-book. I mean, they were regularly trading at 1.5X book or even more. And so, they're trading for literally about [laughs] less than half of what they used to, so.
But going into this quarter, their net interest income was down by 90%, which Wells Fargo is purely a commercial bank, so this is to be expected in a low interest environment. They missed earnings, but they were profitable which is definitely a good sign. Remember the second quarter they had a big red hour there with profitability and remember, they had to cut their dividend because they had to set aside so much in reserves. That wasn't the case this quarter. They were profitable, they earned enough that if this continues, they'll be able to reinstitute their dividend where it was.
They did set aside loan losses. They were the only of the big banks, I think, that actually had to build their reserves this quarter, but it was by less than was expected. They were expected to set aside about $1.8 billion, they set aside about $0.8 billion. So, that was good news. That's compared to $9.5 billion in the second quarter that they had to set aside for losses. So, this is definitely [laughs] an improvement.
But like I said, Wells Fargo is, out of the five we're talking about, the closest thing to a pure savings and loan that we're getting out of the big banks. So, they are the most affected by the pandemic, because they don't have that investment banking revenue to really boost their bottom-line in tough times, like all the other big banks do. And it's really weighing on them. I mean, the fake accounts scandal was chapter one, and then the COVID pandemic was chapter two, in terms of just their underperformance of the market. And it doesn't seem to be letting up anytime soon.
Although, this quarter didn't look as bad as expected, it's still worse than the other banks, because they are purely on the commercial side of the business, and you know, the low interest rates are just punching them in the face right now.
Moser: Yeah. And you know, I was looking at this earlier before we started taping, just taking a look at all five of these banks, their year-to-date performance. And listen, [laughs] no one is lighting the world on fire. You've got Morgan Stanley leading the pack, and they're essentially flat for the year, all of them trailing the market, but Wells Fargo is just having just a really tough year, shares down close to 60%. And I guess my question with Wells Fargo, before we move on, you have to believe, given the scale of this bank, given its presence in the mortgage space, given its presence in the consumer banking space, I mean, this is not a bank that's just going to go away, it just, it can't happen. It feels like this really is a value play, right? I don't feel like this is a value trap. It may take a little bit longer, but given how far the stock has fallen, I mean, how are you looking at this? Are you looking at this more as a value play or do you feel like this is more like a value trap?
Frankel: Well, for all of their flaws, Wells Fargo has a pretty impressive history of low-risk lending. This is how they were able to pick up Wachovia at a fire sale price during the financial crisis, this is how they -- you know, their stock got hit worse than most in the '08, '09 period. They have a long history of responsible risk management. So, I don't think that's changed. And we thought just the loan losses, the reserves they had to set aside, were a lot less than expected this quarter because we're seeing this -- you know, the COVID losses began to play out a little bit more favorably than expected. I see them definitely at 60% of book value as a value play. I don't think Wells Fargo is going to go away, I don't even really think there's a good chance that any of the big banks are going to get acquired, I just think they're going to, you know, survive this storm and move on. I don't really think it's going to do that much permanent damage to their profitability. I mean, the bigger issue is, the interest rates for them, you know, the low interest environment is killing them, the Federal reserve penalty, the restriction where they're not allowed to grow, I think, is still in place. I know it was lifted temporarily for PPP reasons, but I think generally that Fed restriction is still in place. But I think they're going to make it; they're not going to go away anytime soon.
Moser: Yeah, I tend to agree. I mean, we love to give them a hard time here on the show for obvious reasons. [laughs] And you look just, not all that long ago, there's another example out there in Bank of America that, listen, they went through their own stretch, but, you know, focused leadership, obviously the scale of the company, brought things back around; that's worked out pretty well for investors. We'll talk about that in just a minute.
But before we get there, let's talk a little bit about Goldman Sachs, because this is kind of the opposite of Wells Fargo, right? This is going to be more a story really about the benefits of the investment banking operations, even while credit growth for Goldman remains a challenge.
Frankel: I mean, Goldman, we've talked about it before, is pushing more into the consumer space. But like you said, they're still mostly an investment bank. On the consumer side, their consumer banking revenue grew 50% year-over-year ...
Moser: There were a lot of good things about Marcus on that call, I saw.
Frankel: There was. And the biggest driver of that 50% was the Apple Card higher credit card lending balances. But just their revenue was off the charts, up 30% year-over-year, their earnings were almost $10/share, that is the biggest quarter Goldman's ever had. So, during the middle of the pandemic, to have [laughs] your record earnings, that's pretty impressive. I mean, that shattered expectations.
And the reason, like I said, is because a lot of investment banking operations do better during tough times. Goldman's trading revenue was up 29% year-over-year, asset management revenue was up 71%. I mean, they're firing on all cylinders. IPO underwriting was doing phenomenally well. I mean, anyone who's followed the market knows that the IPO market has just exploded this year. And equity underwriting is a big part of Goldman's business. So, the investment banking business is doing the complete opposite of what Wells Fargo's doing. I'm actually shocked that Goldman is not up for the year, after reading numbers like this. And not just this, the quarter before, if you remember, the second quarter was their second-best quarter ever.
So, when you're seeing these kinds of numbers, I mean, Goldman trades for about -- let me do the math real quick. Goldman trades for about 20X this quarter's earnings. [laughs] That's a crazy low valuation. And like I said, I'm shocked that Goldman is not a little more expensive than it is.
Moser: Yeah, that's it. You know, it struck me as well, like, looking at this chart, and the returns, I mean, Goldman down around 10% for the year and given the results that they've brought in, it certainly feels like they could be better, but I guess that also is, that speaks a little bit to just the general feeling in the market today regarding banks writ large. I mean, they're all dealing with the fair sets of challenges, it's just, you know, thankfully for Goldman Sachs, they have that investment banking operation to fall back on.
Frankel: Investment banking revenue is also less consistent, it's worth mentioning.
Moser: Yeah, that's a good point there. It's like Disney's theater division, right, it's lumpy. Sometimes it's good, sometimes it's not so great.
Frankel: Right. Trading revenue goes like this. Yeah, it's a rollercoaster ride from quarter-to-quarter. So, just because trading revenue was strong this year, has no bearing on what it's going to do next year. As opposed to commercial banking, you build your loan portfolio by $100 billion, that produces residual income that comes in quarter-after-quarter, whereas investment banking is a lot less predictable, so the market does discount that a little bit.
Moser: Excellent point. Well, speaking of investment banking, let's talk a little bit about Morgan Stanley. And I think the thing that stood out to me with Morgan Stanley really was the Eaton Vance acquisition they announced. I mean, that was a pretty big deal, it's going to bring a good chunk of change under their umbrella in regard to assets under management, and give them a little bit more of an ESG presence, which I think is very forward thinking. But what stood out to you from Morgan Stanley's quarter?
Frankel: You know, it's interesting that Goldman Sachs and Morgan Stanley are the two biggest investment banks in the country, and they're really going two different directions when it comes to bringing their brands to the masses. Goldman is doing the commercial thing with Marcus and the Apple Card and things like that, whereas Morgan Stanley is pushing into the brokerage space on the retail level. You know, they just finalized the acquisition of E*Trade, they're buying out Eaton Vance, the asset manager.
What really stood out to me, I mentioned equity underwriting when we were talking about Goldman, how IPOs have just, kind of, been off the chart. Morgan Stanley's equity underwriting revenue more than doubled from the same quarter a year ago. That's pretty impressive, it just kind of indicates just how active, I guess, you'd say the IPO market has been this year. Trading revenue was strong up 20% year-over-year. They earned more than the market had expected. The revenues were up 16% year-over-year. So, the, kind of, key takeaway I had from Morgan Stanley is that they had a very strong quarter, they weren't quite what Goldman was in terms of just, kind of, a blowout record-setting quarter, but that's just because some of their business works a little bit differently, especially on the investment side. Goldman has a big portfolio of investments, and Morgan Stanley relies a little bit less on things like that. But you know, I couldn't find that much I didn't like in Morgan Stanley's report.
Moser: Yeah, it seems like consolidation is certainly going to be a big theme of their strategy going forward, at least in the near term. I mean, that Eaton Vance acquisition they saw as essentially inevitable; if they didn't do it, someone else would. And I'd imagine, they're already looking around to see what else they might be able to bring into their universe as well.
Let's go ahead and wrap it up with what I think is probably your favorite bank out there today is an investment, given what we've talked about on the show here before, Bank of America. And again, this has been really an impressive story to watch from a number of different angles, but I think that Brian Moynihan, the CEO, has really done a tremendous job with the business, particularly given the situation that he stepped into. I mean, he did turn the conversation around here and shareholders are certainly reaping the benefits of that today.
And the quote that stood out to me on the call, because this really tells you what's on his mind, where he is thinking, he said, "The operating environment continues to require more operational excellence than ever before." So, it really feels like they're focusing not only on maintaining the culture of the business, but making sure that everything is in order and they're being as efficient and as effective as possible with what they have.
Frankel: Yeah, they've really done a fantastic job over the past decade, over the past few years especially, of just really prioritizing business efficiency, responsible lending, and it's really been reflected in their profitability. You mentioned that they're probably my favorite, and you're right. And it's because they're probably the best combination of profitability, and safety, and growth in the banking space at that kind of a valuation. They trade for a significantly lower price-to-book multiple than, say, a JPMorgan Chase. And I would put their operations, not necessarily on equal footing, but pretty close, at this point.
Bank of America is also a much more even mix of investment banking and consumer banking, which I really like, because in times like these, it really helps kind of boost their revenue. And then in times when it's a really good consumer environment, they get to benefit from that as well.
Just kind of running through some of the numbers that really stood out to me. Well, one, their charge-off ratio declined from the second quarter to the third, which is definitely an encouraging sign. Like JPMorgan Chase, they released some of their reserves instead of building their reserves, which is very encouraging, that means that the impact of COVID isn't going to be quite what they thought it was going to be. Revenue overall was down 11%, much better than Wells Fargo or pure commercial banks. Interest income was down 17%, but on the same time, consumer loans were up 5% year-over-year, which is pretty impressive given the environment. Consumer deposits, if you've been following that at all, people have been socking away money like crazy, which generally happens around a recession. So, consumer deposits are up 21% year-over-year.
They had their second-best investment banking quarter ever; this is where the investment banking, kind of, offset comes in. Investment banking fee income was up 15% year-over-year, it's just a really strong quarter on the investment side of the business. And they earned more than enough to cover their dividend, they beat expectations, but I wouldn't judge any of these banks on just the bottom-line number right now, you really have to look at what's going on, like I said, their loan loss trends, what's going on in the investment banking business, whether their interest income is holding up OK or not, and growth, I mean, growing your loan portfolio that's long-tailed income, deposit portfolio gives you more capital to lend.
And even before the pandemic, out of the big four, Bank of America was putting up the best growth numbers consistently, and growing their loan portfolio by 4% when everyone else was at 1% or 2%. They've been slowly outperforming for a little while. So, I like Bank of America for that reason. I think they're going to continue to improve their efficiency and this might even accelerate Moynihan's plans to do that. And I just see a very bright future for them. They're not quite at the JPMorgan Chase level, but I see them getting to equal footing before too long.
Moser: Nice. Well, I'm going to put you on the spot here then, as I love to do, Matt; [laughs] and this is neither here nor there. But you know, taking a look at this most recent quarter here, of all five banks right here, if you had to crown a winner of this earnings season out of these five, who would you give the crown to?
Frankel: I'd have to give it to Goldman. If I were to pick just one; just I mean, when you look at what was expected of them for the quarter -- we knew they were going to have a strong quarter, but they just kind of just destroyed expectations for the quarter. And I couldn't find anything in that report that wasn't impressive; not just that it was good, but that it just wasn't just like off the charts impressive. So, they had a great quarter, they're not going to keep it up. [laughs] They're not going to have, you know, record after record after record, this a product of the times. But as far as this earnings season, I have to give the title to Goldman.
Moser: All right. Well, for the quarter, Goldman takes the gold. Matt, before we wrap things up, as we like to do when time allows, we want to give our listeners one to watch for the coming week. And given that earnings season is now kicked into full gear, we should have plenty to watch. What is your one stock that you're watching this week?
Frankel: One of my favorite smaller banks is Live Oak Bancshares, ticker symbol is LOB. They are a small business lender; they also have a high-yield deposit platform online. They're really specialized small business lenders and one of the biggest Small Business Administration, SBA, lenders in the country. And they really got a nice tailwind from the PPP loans. They're really a relationship-focused bank, and I think that's going to really pay dividends in a time like this where they really know their customers well, they have a history of having a much lower default rate than their peers, and I think this is the environment where you really need that. So, I'm watching what they have to say when they put out their earnings; I think it's Wednesday, but I'm not sure exactly the date, I think it's Wednesday.
Moser: Yeah, we had the President of the bank, Huntley Garriott, on the show a little while back too; that was a lot of fun. Need to reach out to see if they want to come back on and talk about the state of banking these days, particularly for smaller banks.
I, too, am going to go with a smaller bank, shocker, Ameris Bancorp. I'm sure listeners remember that one; [laughs] I've mentioned it once or twice on the show. But yeah, Ameris Bancorp earnings will come out Thursday, this Thursday after the market closes. Then I believe they have a call Friday morning. So, I'm really just excited to see what is going on with the company. Metrics that we pay attention to, looking at total assets, total deposits. Looking at total assets there, just under $20 billion from a quarter ago. So, we'll see how growth is looking there.
Another point to focus on, I think, and this really had a lot to do with the Fidelity acquisition they made, is the percentage of deposits that are non-interest bearing. I mean, the more non-interest bearing deposits, the more they're able to bring down to the bottom-line, and that was part of that acquisition. They noted that last quarter noninterest bearing deposits made up 36% of total deposits, up 30% from a year ago. So, we'll see where that stands this quarter as well.
And then, for me, really the big point of focus, and they talked about this on the call a little bit is, now that they've digested the Fidelity acquisition, there is certainly the chance of another acquisition happening at some point or another. And they're thinking big, I mean, they're talking about anywhere from $2.5 billion up, so that could be a very interesting situation; kind of like Teladoc-Livongo, merger of equals, perhaps, in the future for Ameris. But we'll be very interested to see what management has to say there.
You know, it's not been the greatest time for banks, but I remain a very happy shareholder of Ameris, I'm happy to be patient with them, I like what they're doing, I trust management there, and I think that they have a lot of opportunity to grow. Very community focused, just like Live Oak, just like you talked about there, Matt.
But I think that's going to do it for us this week, folks. Matt, I appreciate you taking the time to jump on again and give us all of that great insight as to the five bigs from last week, what you thought of their quarters, I'm sure listeners are thankful as well for all that great information. I appreciate you taking the time.
Frankel: Of course. Always fun to talk about banks with you.
Moser: Yep, absolutely. And that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at IndustryFocus@Fool.com. We always want to hear what you have to say.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Thanks, as always, to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser, thanks for listening, and we'll see you next week.