Big Takeaways From the Big Banks' Earnings

We've now heard from all of the big banks, so on this week's Industry Focus: Financials, Matt Fankel and Jason Moser are digging into the results. They're diving into the latest numbers from JPMorgan Chase (JPM -0.40%), Bank of America (BAC 1.59%), Wells Fargo (WFC 1.36%), and Goldman Sachs (GS 1.78%). Plus, we just learned that Bill Ackman's SPAC deal isn't going to happen, so what does it mean for Pershing Square Tontine Holdings (PSTH) and its shareholders?

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This video was recorded on July 19, 2021.

Jason Moser: It's Monday, July 19. I'm your host, Jason Moser. On this week's financials show, we've got some big banks' earnings to get to. Unlike The Grateful Dead, it appears the music has stopped for Bill Ackman-Universal Music deal. We've got a couple of stocks to watch for the coming week. Joining me as always, it's Certified Financial Planner Mr. Matt Frankel. Matt, how is everything going?

Matt Frankel: Good, how are you doing today?

Moser: Man, I've got no complaints, and you know what they say: Even if I was complaining, nobody out there wants to listen anyway. We're going to look at the glass half full, say everything is doing just fine.

Matt, last week we closed the show out with a preview, so to speak, looking at the beginning of earnings season in the banks that were getting ready to report. This week, we're going to talk a little bit about the banks that have reported so far. Primarily, we focused on the big banks this week on the show, and really all of the biggest banks have reported. We wanted to go through the four that really stood out to you the most. I wanted to kick the conversation off today with JPMorgan. We know going into this earnings season, Jamie Dimon, the CEO of the bank, definitely had some concerns that inflation might not necessarily be transitory. Some others -- maybe thinking about what stood out to you this quarter for JPMorgan?

Frankel: Well, it was weird because the stock actually dropped a little bit right after the report, even though the bank beat expectations on both revenue and earnings. As we mentioned earlier several times that the banks put a lot of money aside for loan losses during the pandemic and that we might see some reserve releases, that was absolutely the case here. JPMorgan released $5.2 billion, giving you an idea of how much of things the economy has improved. That accounted for over $1 a share in earnings, all by itself. It beat earnings expectations, it beat revenue expectations. Trading revenue was actually pretty impressive. Remember, in our earnings preview, I was concerned that we would see trading revenue really just fall off a cliff. If you remember, the first quarter was really volatile in the stock market, which generally makes for good trading revenue. Volatility in not only stocks, but in interest rates as well, means more people are trading bonds more people are trading stocks more frequently, think institutional investors things like that. Trading revenue in the first quarter blew everyone's expectations out of the water. 

In the second quarter, it was a boring market in a lot of ways, especially compared to the first quarter. JPMorgan's trading revenue actually beat expectations on the fixed income side and the equity side. Fixed income was $800 million ahead of expectations, equities was $1 billion over expectations. As we go through, you will see some of its peers did not post numbers like that, so that was very promising. But trading revenue is one of those things where it's very tough to predict, and it jumps around from quarter to quarter a lot.

Moser: It seems almost like it's if you look at something like a Disney media company, where the movie revenue can be so lumpy because it's hit driven, you can never really predict how a movie is going to be received and it's not like a steady stream of just hit movies always come in. It's unpredictable.

Frankel: Right. The nature of it is really a good way to describe it, because a really volatile week of the stock market can really boost your equities trading revenue, which is what makes it so tough to predict. Because you have to think back like, OK, it was really volatile in March, it wasn't too volatile in February, that we had that one day flash crash wherever it was trading, things like that. It can be really tough to predict. I don't put too much stock into trading revenue, which a lot of investors don't, which is why those were blowout numbers, but the stocks still dropped. Interest margins really didn't creep up as much as we would hope, still really, really lower than last year. Jamie Dimon, hog loan demand challenged, even though the loan portfolio increased by 1% over the first quarter, it's still a big drop over from a year ago. Deposit base is up 23% year-over-year. People have money, they don't need to borrow it, it is actually a big take on it. A very profitable quarter return on equity was 18%, which is really good for a bank. Anything in the double-digits is usually considered good. A well-run bank, dual wealth beats trading, but we'll see how much that lasts.

Moser: Yeah. To your point there on loan demand, it seems like that's a common thread through this earnings season so far, at least with the big banks and we call that also in Bank of America, I think Wells Fargo talked about tepid demand there. But I think we had referred to this statistic last week or perhaps the week before, but it was just amazing to think about the numbers pre pandemic, you were looking at a savings a lot of consumers had saved $800 billion collectively. Throughout pandemic and all of a stimulus and everything that's gone on, those savings balances jumped up to $3 trillion, basically played out to four years worth of saving all pulled forward in a one year, so it's easy to understand why loan demand would be tepid because like you said, customers are with all of the challenges, consumers generally are flush with some cash.

Frankel: Yeah. I can see that changing over the next few quarters.

Moser: Yeah, it feels like it has to. That's not an endless pot of money.

Frankel: As we go through Bank of America's numbers, you'll see that consumers are spending a whole lot. There's deposit balances are going to start wildling the way down and then what happens then people need to borrow money or stop spending. But let's be honest, Americans generally choose to borrow money rather than not spending.

Moser: Yes. The puts and takes of a credit driven economy. Let's talk about these Bank of America numbers because that's another one where I was looking through this call. It was interesting to see the revenue down modestly, 3.5% from a year ago, but it sounded like investment banking fees played a role there. But what stood out to you there with Bank of America's quarter?

Frankel: Yes. Bank of America, they missed revenue expectations, which is really rare for a bank. Banks generally beat expectations. I really don't know why they even bother putting out expectations because they just beat them every quarter, but Bank of America had a rare miss, they missed revenue by about $200 million. But if you said a lot of this was on the investment side, specifically the trading revenue. Remember, I just said that JPMorgan blew out expectations out of the water for trading revenue. Between the two fixed income and equities, they beat by $1.8 billion, Bank of America did not. Bank of America missed trading revenue estimates on the fixed income side by $800 million, so $800 million lower than expectations. If they missed their revenue expectations by $200 million, but missed trading revenue expectations by $800 million, that means the rest of their business actually beat expectations.

Moser: Yeah.

Frankel: Another concerning thing, net interest margin was, I mentioned this is a problem across the board, but was even lower than expected, net interest margin was 1.61%. That's 26 basis points lower than it was a year ago, and a little bit lower than analysts were looking for. Like JPMorgan, they released some reserves, they released $1.6 billion in reserves. Their loan book grew in the second quarter slightly, but for the first time since the pandemic started, I guess consumers are going to start spending money. One of the most interesting things and then I'll stop talking about Bank of America because I talked about them enough on our show, they actually put out a lot of consumer spending data in their earnings presentation. Remember, Brian Moynihan a couple of weeks ago said consumers were spending about 20% more than they were before the pandemic.

Moser: Yeah.

Frankel: But now we have the hard numbers, it's actually 22% more than the first half of 2019. He broke it down into categories. Consumers are spending more than pre-pandemic not just 2020, everyone knows we're spending more money on gas and groceries and stuff like that now than we were in 2020. I don't think I bought gas during the second quarter of 2020. 

Frankel: You probably didn't need it.

Moser: I'd tell you, I'm still not buying a whole heck of a lot of it, though it's a lot more now than it was a year-ago, that's for sure.

Frankel: The average Bank of America customer is spending 34% more on retail than they were before the pandemic, 20% more on services, 16% more on food, and 8% more on gas than they were in 2019. They're spending 13% less on travel, so that really hasn't come back yet. But even with that, across the board, that's 22% higher consumer spending than before the pandemic. Deposits are up, loans are down, but how long is that going to last if people are spending like this?

Moser: Yeah. That's a good point. Deposits are up 14%, that's considerable. But to your point, again, more credit reserves released, much like the loan demand, that's another common thread we're seeing, and it's a good indicator these banks are feeling better and better about being back to where they were before 2020. Ultimately, that's an encouraging sign there, but yet another common thread to pay attention to with these banks. 

Let's pivot to Wells Fargo, another bank that you follow closely. I'll remind listeners that this is the bank that you tapped at the beginning of the year for your financial stock of the year, and so far that's working out very well for you as I watch this thing continue to creep upward. It's not without its challenges, they still haven't had that asset cap lifted yet, Matt. I think that's coming sooner rather than later, but it seems like it was a pretty good quarter all the way around. Iain followed some of those common threads we've been talking about.

Frankel: With that asset cap, he mentioned that other banks had their deposits up 10%, even over 20% year-over-year. Wells Fargo didn't, their deposit base is only up 4%, and a lot of that is because they're not allowed to grow. If they take in more assets than they are allowed to, they have to get rid of it somewhere else. But they are the top-performing bank stock year-to-date, if only someone had suggested them.

Moser: You hear that, folks? That's Matt tapping himself on the back.

Frankel: No, just the stats, the stock's up 43% year-to-date, Bank of America is up 32%, JPMorgan 23%, the S&P is up 16%. So banks as a whole are beating the market. The financials to show are looking pretty good, normally it's the tech show that's the star of Industry Focus. 2020, 2019, it was all the tech stocks going crazy. Now it's our turn. Wells Fargo, their quarter looks pretty good. Revenue and earnings both beat expectations. They released $1.6 billion in reserves. Revenue grew 10% year-over-year, which, given their asset cap, is pretty impressive. Net interest margin is better than most of their peers. Still did not live up to expectations, but I mentioned Bank of America's was $1.61 billion. Wells Fargo's a little over 2%, so their profit margin looks pretty good. They said that loan demand is not doing too great, and with the loan portfolio down 12% year-over-year, it's easy to see why they would say that. But just the fundamentals of the business are looking so much better than they were even a couple of years ago. Return on equity is almost 40% in this quarter, which, remember double-digits is good. Last year it was -10.2%.

Moser: I was going to say the efficiency ratio seems like it's coming back around.

Frankel: Yeah, they were expecting about 76%, which to put it in context, JPMorgan's is 56%, which is a good number.

Moser: Wells was 80% just a year ago.

Frankel: Yeah, now they're at 66%, and lower is better with efficiency ratio, so we want it in the 50%. But it's getting there, it's getting toward where it needs to be. It's becoming profitable, they recently doubled the dividend. Remember, they had to cut the dividend at the start of the pandemic. It's not quite back to where it was, but all things are looking good. We need the Fed's asset cap to be released. I don't know what the Fed is waiting for. It seems like Wells Fargo has made all the right moves, if you ask me.

Moser: Yeah, it does. It does feel like they're developing this track record of just consistency, and that I think to me, and I know we've talked about this before, but I just want to reiterate. You can offer up your twos here, but it just feels like it was so key for them to bring in an outsider in Charlie Scharf as the new CEO. They made a mistake the first-time around, keeping an insider when all of those culture issues were really coming to the surface. Just to me, it really does show the value in bringing in that outside set of eyes that can take a bit more of an objective look and not feel so tied to just legacy constructs of how that business was running itself from before.

Frankel: Yeah, I would agree. I think they're making all the right moves. Remember, we talked last week about them cutting the personal lines of credit, they could have done a better job at handling that.

Moser: That was a little bit of a failure.

Frankel: I'm sure that didn't make regulators happy.

Moser: No.

Frankel: It looks like they're doing pretty good. They've improved their culture. Like you said, they brought in some outsiders. I would have thought it would have happened by now.

Moser: Maybe that's a headline here, the back-half of the year that just keeps this thing going in the right direction. I don't know, maybe we go back to the beginning of the year. I think it's just a great call by you and I love seeing it workout. Let's hope the ball keeps rolling. It seems like they are setting themselves up for success here, so that's a good thing. In regard to investment banking, investment banking, I think, really had an interesting period of time here, particularly with all these IPOs, the SPAC, there's just been a lot of business to underwrite lately. How did that impact Goldman Sachs? Because that's the investment bank, this bank really should be shining in this investment banking environment.

Frankel: Yes. Their investment banking revenue was the second-highest it's ever been. The first quarter was the highest, so they almost beat their own record. The IPO market certainly helped Goldman's big IPO underwriter. There has been $135 billion worth of IPO issuance so far this year. The average for a full-year over the past five years is $53 billion. We're well above what you would see in a typical full-year in the IPO market, and that's not SPACs, that's traditional IPOs. Goldman, that really helped. Trading revenue was down but exceeded expectations. In a non-volatile environment, you're not going to stay that high forever. Earnings really smashed their expectations. Like I said, I don't know why they even put expectations for Goldman's earnings because they seem to beat them every quarter. They just increased their dividend by 60% after the stress tests were released. Their business is looking great, they're maintaining their No. 1 market share in most of their key categories. Revenue came in over $3 billion above expectations. We'll see how the IPO market continues for the rest of the year. But all these IPO alerts I'm getting from my TD Ameritrade account. There's a new one. I've gotten three today, so it doesn't look like it's slowing down anytime soon.

Moser: Now, it's a good environment to get out there and raise some money. Do you get any feel for how Goldman is doing with its Marcus offering, how is Marcus in general? I know you've interviewed some thoughts from the team there in regard to Marcus, clearly they're making big investments. How is Marcus performing?

Frankel: Marcus is the personal loan and savings platform for those who don't know. They're one of the few that their deposits are up year over year, which is nice. Right now their loan balance is up here every year.

Moser: Oh, that's good.

Frankel: But a lot is because they have some high-value loan products. Remember they're Apple's credit card partner, they recently took over GM's credit card business. I don't know if you saw the recent news, they're developing a buy now pay later lending service for Apple.

Moser: Yes, I did see that.

Frankel: Specifically for Apple. Right now, with your Apple card, you could finance your MacBook over 24 months interest-free, things like that. Now they're developing something that will let you do that for any purchase in conjunction with Apple. We saw Affirm stock get hammered after that. They're the leading "buy now, pay later." Goldman is really going all-in on consumer banking and it's still a really small percentage of the total. I don't have the number right in front of me, but it's less than 10% of their business. But I can see that becoming much bigger in the coming years.

Moser: Well, Matt, another story that we've been following here over the last several weeks, and one you've really dug into a good bit and explained very well, I might add, because it is a complicated story by virtually every angle but this is Bill Ackman's Pershing Square Tontine. We've been talking about this move to acquire 10% of Universal Music through this back offering from Pershing Square. Then we now see that actually, this deal isn't going to happen. It looks like Pershing Square Tontine is dropping this deal to buy 10% of Universal Music. I'm wondering if you could explain the nuts and bolts of what's going on.

Frankel: Well, I wish they would have looked into whether the SEC would have approved this before they decided to. I'm disappointed in that, to be honest with you. The whole point of a SPAC is to acquire a full business. To have a business combination. You can make the argument that acquiring a 10% stake of a music company is not a business combination.

Moser: Yeah.

Frankel: I have the press release in front of me. The SEC's problem, in particular, was whether the structure of this qualified under the rules. They call it the structure of their intended business combination, whether they're qualified. Now I'm kicking myself for spending hours looking through the structure of the deal [laughs] and trying to understand this thing now that it can't go through. But so what happens now is the question.

Moser: Well, yeah. What is happening now?

Frankel: Now they still have $4 billion of cash sitting there. Pershing Square itself, the hedge fund, not the SPAC, is going to go ahead with the 10% Universal stake. Pershing Square is still buying that. It doesn't help the SPAC investors at all. Now they have $4 billion. They are going to pursue a traditional SPAC business combination, where they actually buy a business. Bill Ackman was on CNBC this morning. One of the biggest obstacles, and also one of the biggest competitive advantages, is that this is the biggest SPAC ever. Investing that $4 billion only makes sense with a handful of companies. Remember, we did our fund episode where we named like 20 companies they could buy.

Moser: Sure.

Frankel: I think Chick-fil-A was one of them. Subway was one. Things like that.

Moser: Yeah. 

Frankel: That's also a big limiting factor. But he said that's not necessarily a limitation. They could acquire a smaller company and pay a dividend to shareholders with whatever is left if they wanted to do it that way. But now they still have 18 months left on the clock to execute a business combination. He made the point on CNBC this morning that they are not starting from zero. Before they settled on the Universal deal, they had discussions with a lot of other companies, so they can just as easily pick those discussions back up if they want to. He said they're getting into this with a running start. Not terribly worried about it, I'm holding onto my shares because they're pretty much not trading at much of a premium. They have $20 per share in cash sitting in that account, and I think it was trading for $20.50 less their worth. It's approaching the floor. That $20 creates a price floor because that's cash sitting in an account. I'm holding onto mine, I'm optimistic, I'm disappointed, I'm not going to say I'm not. I thought this was a done deal that would have a really good long-term structure, which I still think it would have been. But obviously the SEC said, this is not what SPAC's are for. "You're pushing it, Bill Ackman," it's what they're saying there. "You're pushing the limits a little too far."

Moser: Well, hey listen, you got to play by the rules and I guess it makes sense to not throw good money after bad if it's something they feel like they can pull off. But we shall see. Matt, before we take off, let's give our listeners a couple of stocks to keep an eye on this week. What is your stock to watch this week?

Frankel: I am watching some of these homebuilder stocks if you have just gotten beat up lately. Dream Finders Homes (DFH -1.32%) is one in particular I'm watching, it is one of the latest additions to my own portfolio, the ticker symbol is DFH. In the first quarter, their homes delivered went up 95% year-over-year because the real estate market has gone crazy. Their new order book was up 137% year-over-year. They had a backlog of over 3,600 homes at the end of the first quarter. This is a company that's built a total of about 10,000 homes in its history. That's a big backlog. They focus on the Sun Belt markets, they're based in Jacksonville, and have a presence in the Carolina's. They actually have a presence in DC, which is not as far north as they'll go, so you might see some Dream Finders Homes signs around where you are. But a company I'm watching especially for the next few years, they're growing really rapidly, so I want to see if that keeps up this quarter and for the rest of 2020. But the stocks really pulled back tremendously lately. It's back on the top of my watchlist and I might even add to my new position.

Moser: There you go. I'm going to be keeping an eye on not really a financials company, so to speak, but we enlist most stocks to watch. We open up the universe here for all listeners. Given that it's earning season, I'm actually going to be keeping an eye on Chipotle (CMG -1.34%). Earnings for Chipotle come out Tuesday after the market closes. You look at the five-year chart for this business, particularly given where they were not all that long ago and to the food safety crisis there that they went through. The five-year chart for this company, stocks up 275%. That has been one heck of a comeback. Year-to-date shares are up, a little bit, they're underperforming. But it was one of the stars, I think, of 2020 from an operational perspective. This is going to be a quarter at comps over one where things were getting pretty dicey just a year ago. I think it will be interesting to see how that comp works out for them. Last year they stood at around 15 million loyalty customers, and their digital sales in that quarter a year ago grew 216% from the previous year. Highest ever quarterly level at that point in time represented 61% of overall sales. I think it's just going to be interesting to see how this business reports and compares to a year ago, particularly when you consider that it really is one of the restaurants that helped spearhead so much change over the course of 2020 where that change really was just an absolute necessity. It is a stock I still own a few shares of, believe it or not. Matt, I'm feeling pretty good about hanging onto those shares. Because this has been a long-term big fat winner, do you own any shares of Chipotle?

Frankel: No, but you know who is a loser in that one? McDonald's. Remember, Chipotle used to be a subsidiary of McDonald's, and they sold it for something like $10 million.

Moser: I do remember that. I remember that well. Yeah, you got to feel like McDonald's is kicking themselves.

Frankel: Next time you go through the McDonald's drive-through, I don't know if you do that or not, but thank them for getting rid of Chipotle and making you some money in the process.

Moser: That's right. Well, Matt, I think that's going to do it for us this week. As always, thanks so much for taking the time to join us.

Frankel: Of course, it's always fun to be here.

Moser: Remember, folks, you can always reach out to us on Twitter, @MFIndustryFocus, or you can drop us an email at [email protected]. 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.