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2 Big Fintech Stories to Watch

By Matthew Frankel, CFP® - Jan 21, 2021 at 12:41PM

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We also dig into fourth-quarter earnings from three big banks.

In this episode of Industry Focus: Financials, contributor Matt Frankel, CFP, and host Jason Moser look at fourth-quarter earnings from Wells Fargo (WFC -0.79%), JPMorgan Chase (JPM -0.82%), and Citigroup (C -0.06%). They also dive into Walmart's (WMT 0.11%) announcement that it plans to launch a fintech, as well as the scrapped merger plans between Visa (V 0.84%) and Plaid. Finally, hear why Goldman Sachs (GS -0.45%) is on Matt's radar this week, while Jason has his eye on a certain streaming giant.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 18, 2021.

Jason Moser: It's Monday, Jan. 18, I'm your host, Jason Moser, and markets are closed today for Martin Luther King Junior Day, but we still got plenty to talk about here on Industry Focus. On this week's financial show, we're going to take a look at the big banks earnings that just kicked off earning season on Friday. Walmart is getting into fintech, Visa and Plaid are going their separate ways after all. We'll wrap up the show with one to watch for you. Joining me this week, it's my man, Certified Financial Planner, Mr. Matt Frankel. Matt, how's everything going?

Matt Frankel: Pretty good. We get a rare break in the middle of earning season, we could take a step back and really digest the information now.

Moser: Yeah, exactly. I like that. Get a little time to digest, and then I'll tell you, this week it really starts kicking off, and then next week, man, we're talking about a lot of companies that are going to be reporting here over the next few weeks. We always enjoy earnings season, plenty to dig into with all sorts of different businesses. But we are going to focus on three of the biggest banks in the market today. On Friday, we had three earnings reports from JPMorgan, Citibank, Wells Fargo, and it felt like some were better than others, Matt. [laughs] We're going to go ahead and start with JPMorgan. I think one of the things that we've been focused on here over the past several months has been in regard to the reserves that these banks have been putting aside and the perspective there on where they stood in building those reserves versus starting to release some of those reserves. It feels like maybe we saw the beginning of some of those reserves being released this quarter. But let's start with JPMorgan and talk about what stood out to you for the quarter, and also, how things may be shaping up here for 2021.

Frankel: We knew the actual business numbers from all of these banks weren't going to be great this quarter. Interest rates are at record lows, banks make money on interest, so we knew that wasn't going to be great. For the sake of saving time, all three of these had terrible interest margins.

[laughs] The end. All right, we're done. But no, in all seriousness, JPMorgan was the best of the three that reported on Friday. They reported a beat on both revenue and earnings. They really surprised the market. Big reason for the earnings beat was because they announced a $2.9 billion reserve release. They still have about $30 billion in reserves to cover loan losses and things like that, and Jamie Dimon basically said that he feels comfortable enough. He gave the examples of the vaccine being available and all the stimulus that is and is expected to be injected into the market, as the reasons why he's comfortable doing that. That was by far, as we'll go through, the biggest reserve release of the three. All in all, the earnings actually were pretty good. JPMorgan got the No. 1 share in investment banking fees for the quarter. They generated a 54% efficiency ratio for the full year, which is pretty good. That would have been really good. In the post-crisis years, that would've seemed unbelievable. Their loan portfolio barely budged, but given the pandemic, that's not too surprising. Deposits are up 35% year over year. Americans have become super savers during the pandemic, as we've mentioned a couple of times.

Moser: Well, that's something I noticed too, it was a trend across all three, deposits really were up. Not surprising, of course, but that was a clear trend across all three reports.

Frankel: Yeah. Another way to put that is that now banks have a lot of money to lend. In JPMorgan's case, that deposit base went up by 3%, the loan base only went up by 1%. There's a lot of idle capital sitting on the sides ready to lend. If we do see a big economic rebound in 2021, these banks have a lot of money to put to work.

Moser: Yeah, they do. One thing that did stand out to me too in regard to JPMorgan's book value, they grew book value by 8% through the quarter. Listen, it's a bit of a tricky time for a lot of businesses, but I felt like that was pretty robust growth all things considered.

Frankel: Well, it's even better than it seems, and I'll tell you why. The banks have not been allowed to do buybacks much in 2020. Usually, banks' book value is a function of how many shares they're going to buy back, plus their earnings building up. Banks have not been able to buy back shares, so that whole part of their book, that is not adding to book value. Normally, if a bank's book value increases by 12% in a year, usually, 8% or 9% of that was buyback driven. JPMorgan managed to increase its book value by eight percent without buybacks essentially, in 2020, which is really impressive.

Moser: Yeah, it really is. I feel like you can attribute just so much of the success of JPMorgan. Really to me, it just all seems like it comes back to Jamie Dimon. I was reading through that earnings report, they have that section in the report called fortress principles, which I think it's so cool to see, because it gives you an idea of what their mindset is. It's building a balance sheet and a company that is able to withstand crisis regardless of when, of where, how large. That's the focus there with Jamie Dimon there. I don't know if you read that Wall Street Journal article a few weeks back, and it was an article about Jamie Dimon. Remember he had I guess it was a heart attack, and he had gone to the hospital, they were talking about managing their way through the pandemic, and it was just interesting to see they've prepared this business for almost everything, if not everything, and anything.

There was even that one snippet from the article where he was on his way to the hospital, he had called his associates at the bank to let them know what's going on and to go ahead and they knew what to do. They then said, "Okay. Yeah, we're going to kick the plan into Jamie just got hit by a bus. This is the Jamie got hit by a bus" situation. Preparing the company for the potential, at least, of him not being back in that leadership role, either for a long time or ever. Listen, we're all glad he's back, but it speaks to me that that's his mentality, that's his mindset, that's their mindset there, to essentially be prepared for anything, and I feel like their results just showed that quarter in and quarter out.

Frankel: Yeah. No, I definitely agree. Jamie Dimon, I don't want to call him an underrated guy to listen to in the stock market, but I think he's right. I'd put him right up there with Buffet in terms of when he talks about the economy. As much as the reserve release that we talked about is important, I think his comments on it are equally important, that he feels that we're going to be OK out of this. His comments carry a lot of weight because he's usually right. [laughs] He's probably the most visible bank CEO, and for good reason.

Moser: The other leader that stands out to me and we'll hear more from this bank this coming week, is Brian Moynihan at Bank of America and he's been with Bank of America now, I think since 2010 as the CEO. He to me is the other leader in this space that's really building, to me at least, that same type of reputation, that same type of trust, that same type of mentality of really building a bank that is prepared for anything and everything. It'd be interesting to see the results when they come out. Let's pivot over to Citi. Citi released earnings as well. Again, I think the story there partly at least, was the release of reserves there. But what were your impressions of Citi's most recent quarter?

Frankel: Citi's quarter was good but not great. They released some reserves, $1.5 billion, so they are also feeling pretty confident about where they're at right now. They beat on the earning side of things, a lot of the debt reserve release had a lot to do with that. But revenue dropped 10% year over year, didn't quite meet expectations, so it's a mixed bag. Their loan portfolios on the consumer side were up by 4%, which is actually pretty nice growth given the current environment, I mentioned JPMorgan's was up 1%. But their deposit base was up 2%. Remember, I mentioned JPMorgan's was up 35%. I don't want to call a 20% deposit growth bad.

Moser: [laughs] Relatively speaking, it was just not as good.

Frankel: Relatively speaking. One thing that really stood out to me, I was looking at their credit card spend numbers, not necessarily for Citigroup purposes, but just overall economic purposes. Their credit card spending volume in their credit card business was up 12% from the third quarter, which shows to me that consumers are ready to get out and spend a little bit more, and we could start to see the overall economic activity picking up. Investment banking was strong, trading revenue was up 1%, that's been a pretty strong point during the pandemic. Trading does well when the market's volatile, which was certainly the case in 2020. But I'd call it a good quarter, if not a great quarter. But definitely a good one.

Moser: Well, let's move to the quarter that was probably the least impressive of the three. But listen, I'm going to cut Wells a little bit of slack here while we're at it. I don't know that going into this report, I had all that great expectations, anyways. But there were some good, there were some bad. Wells Fargo, clearly, has some work left to be done though, right?

Frankel: Yeah. They acknowledge that. You'll remember I called Wells Fargo my favorite bank stock to watch a couple of weeks ago on our show?

Moser: Absolutely.

Frankel: That wasn't because I thought their fourth quarter is going to be great.

Just to run through a couple of the things that disappointed investors. They not only missed revenue, but they missed it because of interest income. We already knew that interest was going to be bad, like I said, but it was even worse than expected, which is dragging the stock down. They booked at a $781 million restructuring charge, because they're shifting their business around a little bit. They released $757 million in reserves. But unlike the other two banks, it wasn't because they feel like they have enough to cover their losses. It's because they got rid of their student loan business and don't have to keep reserves for that in the bank anymore. They released reserves, but it was for a less positive reason. Charlie Scharf, he commented on it. He essentially said, "We know these results are bad." He said we're going through a lot of changes right now getting through the, he called the legacy issues, I believe was the term he used. He said, "Unwinding all that costs money, and it's really weighing on our results." But he said this bank's capable of more, and I think you're going to see that. The stock was down pretty big this morning on the results. But I'm not that worried. I view it as a buying opportunity. I still like them as a great bank stock for 2021.

Moser: Yeah. I'm with you. I certainly understand the short-term concerns there, but you can't just turn things around at the drop of a hat. It's going to be something that takes a little time. It really feels like to me, they took the board, took the first most important step really in bringing Charlie Scharf on there. I think bringing a leader in there who was not an insider before, it's going to give them a fresh perspective. I think it's going to give them credibility. The changes he's making will actually stick. It's just going to take some time for that to play out. My bet is that we will see things start to improve as the year progresses. Well, it's a good start to earning season there. I don't think there were a lot of surprises in those bank results, to be honest with you, nice to see those reserves being released. I think that's a positive. I think we'll have to obviously wait and see how things shake out here as we round this core of the pandemic and vaccines continue to be distributed, but let's say we're cautiously optimistic maybe. It would be interesting to see what the Bank of America has to say this coming week here.

Matt, let's pivot over to what is traditionally not a bank or a financial company really, although they've reputation for offering their customers financial services. But Walmart recently announced that they are going to launch a FinTech start-up with Ribbit Capital, which is one of the investment firms behind Robinhood. Given the number of customers that come through Walmart's doors everyday, Matt, I actually think this probably does make some sense.

Frankel: Yeah, it's definitely got some potential. It sounds a lot like what Green Dot has been doing for the past few years. [laughs] Walmart is Green Dot's biggest customer.

Moser: Yeah.

Frankel: They might be worried about this. [laughs] I think I remember reading Walmart makes up about 35% of Green Dot's business. Their banking products are essentially made by Green Dot right now. But their plan is to essentially leverage Walmart's scale and just the volume of its retail operation, along with Ribbit's FinTech knowledge to create a company. We don't know what the company is exactly going to do yet. They said they're going to do some specifically tailored financial experiences for Walmart shoppers, whatever that means. [laughs] They specifically also said that they may grow through partnerships and acquisitions, which I found to be the most interesting part of that press release. But we don't know a lot yet. This reminds me a lot of when Berkshire Hathaway and JPMorgan and Amazon announced their healthcare company. No one really knew what it was going to do. I still don't know what that company did. They already shut it down.

Moser: I guess we won't know for a while [laughs] the lessons that they may or may not have gleaned from that experience.

Frankel: I don't know. I want to hear more, is essentially how I would best sum that up, is we don't know a lot yet. It sounds like an interesting possibility. But I want to see how they're going to do something different than what's already being done, I guess is my biggest question.

Moser: I think that's really the question, what are you going to do differently? I think that makes a lot of sense. Then of course, keeping an eye on how this does play out on Green Dot. I mean, it would be the knee-jerk reaction, I would think to assume that this is something that would just immediately impact Green Dot's business, because that then just assumes that this fintech is a success from the get-go. Obviously, that's yet to be determined. Yeah, plenty to learn there in regard to that partnership and we'll enjoy keeping an eye on that. Speaking of partnerships and acquisitions, Matt, there was an acquisition that is not going to happen after all. It's been about a year since this deal was announced. We talked about it on this show. You could certainly see the merits of the deal and why the two companies would be getting together. But alas, [laughs] while Visa and Plaid would have you believe that this was a mutual decision, [laughs] it really feels like that mutual decision was spurred on by the actions of regulators to basically really make it difficult for this deal to happen in the first place. Visa and Plaid will not be joining. That acquisition is now off.

Frankel: Yeah. They had announced this last January. Then all of a sudden in November, the Department of Justice sued to stop the deal, saying that it would be an anti-competitive situation, things like that. Visa disagreed. They said that they could have gotten this deal through, but it just became really more trouble than it's worth at this point. They called the deal off. If you're not familiar with Plaid, the best way I've been able to describe it is that it lets consumers connect their bank accounts to finance apps. They're the technology behind Venmo, for example. When you send a payment through Venmo and it comes from your bank account, that's the technology that allows that to happen. They're also a Robinhood partner, Coinbase is the big crypto exchange. They're the technology that links user's bank accounts to that platform as well. I can see why the government wouldn't want a company like Visa to have full control over something like that. But the most likely scenario now is that they're going to go public. I think they're a great stat candidate, to be honest with you. [laughs] Because of 2020. [laughs]

Moser: Well, I was going to ask you about that, because there was something I thought about as well because the first thing that came to mind was that this certainly opens up the opportunity for Plaid to maybe go public on its own. I have to believe, given the current environment, they would be interested in doing that because they'd raise a ton of money, I'm sure. If they decided to do it, you're probably looking at another stock that triples or quadruples on the day of the IPO. I'm only half kidding there, you've seen the way some of these companies have been received by the market. What do you think? Assuming that Plaid does go public, does it feel to you, I mean, Shamath all of a sudden looking at this, and saying, man, let's help these guys out, and get these guys public in more of an appropriate way to where it doesn't leave money on the table, whatever that perspective. What do you think the chances of them going this back route actually are?

Frankel: I know he immediately tweeted about it when the deal broke up. I know that happened. Visa was going to acquire Plaid for $5.3 billion, which in fintech company terms in 2021, that's like a quarter [laughs]. If they were to go public through the traditional route or anything close to that valuation, I can clearly see him triple or quadruple pretty quickly. I think they are the perfect candidate for a SPAC IPO, especially if they could partner with a SPAC manager that has a lot of Fintech experience or relevant experience to bring to the table because that was the big value of the Visa arrangement, was that Visa could leverage its technology and its network into Plaid's ecosystem. If they could do that, that's another big advantage. It's not just that SPACs avoid the traditional IPO route, it's that SPACs are run by managers who can often bring something to the table. That's another thing that's worth noting. There's a lot of SPACs run by experienced fintech managers that can really add a lot of value and bring a lot to the table, so that's also something to watch.

Moser: Yeah. At the end of the day, it really does seem like for Visa, it was interesting to note, back in November, Mastercard was able to acquire Finicity, which is a start-up very similar to Plaid. Now, I think the reason why that was allowed to go through without too much trouble was that Mastercard is smaller. They have a much smaller share in the debit market, and I think the debit market maybe was the concern there and that Plaid could be working on those types of services. Certainly, Plaid is working on helping folks get money from point A to point B more quickly, and more cheaply, in criticisms of Visa, and Mastercard networks, and in the fees that they charge, I mean, those are valid. I think that what we're seeing over the longer haul here is those costs are coming down, and that's not really a surprise to anybody but on the one hand, you look at Visa, and you think, well, that tollbooth model has worked so well to this point, but listen, it's not an undisruptable business. I mean, it's a big company with a lot of financial resources in plenty of capability. But maybe this is one of those situations where they say, hey, this didn't really work out for us, we need to go back to the drawing board here and try to figure out exactly how we're going to attack this market, because complacency is by far and away one of the biggest risks you have with a company like Visa, I would say.

Frankel: Yeah, Plaid gets them into a part of the payment space that they are not currently participating in really, meaning the person to person, and business-to-business payment space. Visa's, they're a huge debit card issuer, they're obviously a big credit card issuer. They generally move money from consumers to merchants. Plaid moves money from people to people. Like I mentioned, Venmo is a big Plaid partner. Visa quoted the $185 trillion global payments market that includes things like person-to-person payments, and business-to-business, and moving money around in other ways than traditional card payments, so really just extends their reach into that area of the opportunity that they see.

Moser: Got you. All right, Matt, well, before we wrap it up this week, let's go ahead and offer our listeners one to watch with earnings season kicking off. We have plenty from which to choose. Typically with earnings season, we'd like to open it up. I mean, we're not going to be just financial specific, we have so many companies out there. You can go any direction you want. But what's the company you'll be watching this coming week here?

Frankel: Well, I'll go financial specific, [laughs] Goldman Sachs reports tomorrow. Just last week, they announced a new partnership with GM as their new credit card partner. Goldman launched the Apple Card not that long ago, and they call that the most successful credit card launch ever. Well, the Apple Card has about $3 billion in consumer balances. GM credit card users spend $8.5 billion a year. This really grows their credit card business. I'm curious to see any management comments about that. I want to see what trading revenue did, because volatility calmed down quite a bit. I'm especially curious now that we've seen JPMorgan, Citi, and Wells Fargo, because their trading revenue was all over the map. I want to see what Goldman, which is really dependent on investment banking, did during the quarter, and I think we're going to be pleasantly surprised, especially on the lending side of the business, on the trading revenue side of the business. I think the IPO market really helped out their investment bank. I can't remember a stronger time than in the latter part of 2020 other than maybe the tech boom, where the IPO market was going that crazy. I'm curious to see how all that played into their earnings this quarter.

Moser: Well, I'll go the other direction. I'll take a company that's not financials related. Although I'm going to be very curious to know their perspective on capital, but Netflix reports earnings on Tuesday, it's a fascinating company for me to follow. I don't own it personally, I just have always found it fascinating to follow and learn from. But they're calling for around 201 million global streaming subscriptions at the end of the year, and obviously, we've seen a lot of competitive jogging here with Disney+ just on fire for understandable reasons. I saw where Netflix was saying, I think they're calling for one new movie every week for 2021, which I don't know, that's interesting. I don't watch a whole lot of Netflix stuff, but more power to them if they can make that happen. It is such a strong subscription business. I think the real question mark for me, two of them, is just how much further they feel they can go with pricing, and also where they stand on capital today. Are they going to be looking to raise more money either through the debt markets or perhaps issuing shares? I would think they would probably go through the debt markets first, but just a lot of different ways to look at this business, and it's just always fascinating and I consider Reed Hastings, obviously, one of the smartest guys out there, so I'll be looking forward to that report on Tuesday.

But Matt I think that's going to do it for us this week. I appreciate you taking the time to jump on, as always, even during a day when the markets are closed, and you could have been out there, I don't know, playing golf, or hiking through the woods, or doing something. But no, you took the time to jump on here with me, and I appreciate it.

Frankel: Yeah. Always a good time, sorry if anyone heard dogs barking during that.

Moser: [laughs] I think that's become par for the course for us, man. I think our listeners are used to it by now between me and you [laughs].

Well, remember you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at As always, people on the program may have interest 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.

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