With bank earnings set to start hitting the wire this week, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a look back at how the major U.S. banks fared in the second quarter. They also take a look at some of the biggest news stories about JPMorgan Chase (JPM -0.05%), Bank of America (BAC -0.68%), and Wells Fargo (WFC 0.74%), and give a rundown of what they'll be watching in the third quarter results. 

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This video was recorded on Oct. 11, 2021.

Jason Moser: It's Monday, Oct. 11. I'm your host, Jason Moser, and on this week's financials show, folks, don't look now, but it's Earningspalooza. Yes, that's right. Earnings season gets under way this week, which means we're excited and we're going to be hearing from a lot of banks here in the next few days. Joining me this week for a preview of it all, he's your friend and mine. CFP, Certified Financial Planner, Matt Frankel. Matt, how's everything going?

Matt Frankel: Good. I was just kidding you about you not referring to me as guest anymore, but I like that my friend is here.

Moser: I mean, listen, if we're not friends, then what are we?

Frankel: Exactly. We're all friends at The Motley Fool.

Moser: Exactly. Matt, it is that time of year again. This is the week that kicks everything off. Earnings season is getting under way here. As every quarter, we've got the big banks leading the way. We have got JPMorgan starting it off on Wednesday. On Thursday we'll have Bank of America, Wells Fargo, Citi. And then Friday, we have Goldman Sachs. There's a lot on tap here for these five. They really do, I think, reveal a lot of clues as to how the economy is performing and what we might be able to look for this coming holiday season and earnings season, of course.

But first, let's take a look back at these banks just a quarter ago to see what was going on then, talk a little bit about what they reported a quarter ago, and how that might impact or dictate what we're looking out for this coming quarter.

Let's start with JPMorgan. What are the takeaways from last quarter's earnings that you feel you want to keep focused on here as we go into earnings season?

Frankel: Well, I still clearly remember that they started earnings season off with a bang last year. They're always the first one to report; that's the same this year, or this season. They report on Wednesday. All these other banks report Thursday or Friday. You'll see this theme throughout the discussion today: Deposits were up across the board in the second quarter compared to the year before. You often see consumer savings rates go up in times of uncertainty, and the past year was pretty uncertain. So JPMorgan's deposit base was up 25% in the second quarter, year over year. That's pretty impressive growth, being that we're talking about sums in the trillion-dollar range. Its client investment assets were up 36%, and JPMorgan's loans were down. Another common theme among these banks. Their consumer loan portfolio was down 3% year over year, because people were borrowing less money. There were less major purchases people needed to finance. There was more cash flowing in, in the form of stimulus and things to that effect. So deposits up; loans down.

But JPMorgan's revenue was down by 7% year over year. Mainly fueled by lower interest rates and a normalization in trading revenue, is kind of the best way I could put it.

And the best recent new story I found, Jamie Dimon still does not like Bitcoin. [laughs] Jason, do we believe we know that?

Moser: I was going to ask you about that, because that was something I had read a little bit earlier. That's nothing new. Of course, we know he's a relative skeptic there, but his take on, listen, he said there is no intrinsic value, and then furthermore, he just expects it to be regulated to no end.

Frankel: Yeah, I definitely see the regulation side of the equation now. They're just starting to ramp up regulation. So if people like Elizabeth Warren are all over these banks that have all these requirements they have to meet, how do you think people like her are going to react to a decentralized financial tool with trillions of dollars of money behind it? Bitcoin is known to be used for fraud. It's not like a Wells Fargo, where there's like some level of shady business going on. Bitcoin is known as a tool for fraudsters.

Moser: Oh, yeah.

Frankel: So I think the market's really underestimating the pressure that U.S. regulators are going to put on Bitcoin.

Moser: I don't know if you caught this a little while back, but I did see this headline. I think it was back in June or July. It looks like at least the JPMorgan -- so you know Amazon and JPMorgan partner for the Prime credit card. And I just did notice that it sounds like JPMorgan Chase, they're getting ready to forgo that relationship, and it looks like Amazon was accepting bids to take over that credit card relationship. American Express being one; Synchrony Financial another. And I haven't really seen anything materialize since then, but I just found that interesting, given that around $50 billion a year gets spent on that card. It is a meaningful tool. To see JPMorgan willing to bow out and forgo that relationship -- I don't know if it's going to happen, but I don't know if you've seen anything about that lately, if you have any thoughts on that.

Frankel: Well, first, JPMorgan has a massive credit card business. Amazon's obviously a big part of it, but they have a massive credit card business. It'd still be OK if Amazon wasn't their credit card partner anymore. I've got to wonder if Amazon might have made JPMorgan a little mad by how much they're prioritizing the buy now, pay later. I remember we talked about their partnership with Affirm, to where people finance Amazon purchases pretty easily. We mentioned that could be billions of dollars in revenue for Affirm, and that's revenue out of JPMorgan's credit card pocket.

Moser: Yeah.

Frankel: So maybe they made JPMorgan a little mad with that. I don't know.

Moser: Yeah, it's possible. It's certainly, those relationships become more and more difficult as these co-branded cards, it'd typically result in these robust rewards and cash-back programs. Just, ultimately, it becomes a little bit more difficult for JPMorgan to make money on that deal when you have to shell out those rewards. So maybe that does play into it, given Amazon's penchant for being so customer-centric. Clearly, they would want a very robust rewards program for the card. Maybe JPMorgan just feels like just the juice isn't worth the squeeze anymore.

Frankel: I have to think that Amazon, they get some sort of favorable revenue split compared to other credit card partners, just because of their size, like how Costco can get a better deal from Visa than any other merchant can, just because of the enormity of the purchase volume that goes on those cards. I think maybe Amazon is getting some favorable revenue deal that Chase doesn't want to pay anymore.

Moser: Yeah, I'd imagine so.

Frankel: There's a lot we don't know that happens behind the scenes.

Moser: That's right. It's an interesting relationship there for sure.

But let's take a look at Bank of America, Wells Fargo. We'll start with Bank of America. Clearly, they're a very well-run bank. Brian Moynihan, I've said before, I think when you talked about these bank CEOs, Jamie Dimon is one that stands out, but to me, Brian Moynihan is, like, 1B. He's right there, given what he has done with this business to date here. What stood out last quarter with Bank of America that is going to dictate what you're paying attention to this quarter?

Frankel: Again, common themes. Deposits were up 21% year over year in the second quarter. Loans were down 11% year over year, which, that's a pretty substantial decline.

Moser: Yeah.

Frankel: A couple of things to note with Bank of America. Net interest income was down s6% year over year. That was the bulk of their revenue decline, and the reason is what happened between the second quarter of last year and now, interest rates plunged to record lows. That's great if you're a consumer. Jason and I both refinanced our mortgage, and we were happy to see rates plunge to record lows. But it's not great if you're a bank.

On the other side of things, defaults are not nearly as bad as the banks thought they would be, and they've been getting better. Bank of America's net charge-off rate fell from 0.45% in the second quarter of last year, steadily, to 0.27% this year in the second quarter. Pretty big decline in charge-offs. That's something I'm going to be watching that I'll mention later when we talk about our big long list of things that we're watching with bank earnings.

Another thing I'm watching with Bank of America, and it's actually a positive story: I mentioned banks are seldom in the news for positive reasons, but this is one of them. Bank of America just raised the minimum wage to $21 an hour.

Moser: Oh, wow.

Frankel: They are planning to incrementally raise that to $25 an hour by 2025. They have been in the forefront of paying living wages, as far as the banking industry goes, for years now. I'm wondering if that cuts into their profits in a significant way, or, on the other hand, if it lets them provide better customer service and it's more of a competitive advantage because they are retaining their employees and making their employees happy. I'm curious to see where that goes over the long term and if Brian Moynihan makes any comments about it during the conference call.

Moser: Well, as I mentioned earlier, Wells Fargo has had a great year so far. I was looking at a chart of all of these banks earlier. Looking at Wells Fargo, Citigroup, Goldman Sachs, Bank of America, JPMorgan, comparing them to the market year to date. They're all actually outperforming the market as of today, year to date. Standing at the top of the list there, Matt, and listen to me, we've got to give you a shout out here, because it's Wells Fargo at around 60% returns so far year to date. And the reason why I want to want to shine a light on that is just because, again, going back to the beginning of the year, Wells Fargo was your financial stock of the year. We were talking about what was the stock you felt like investors really should have an eye on for this coming year in the financial space, and you picked Wells Fargo, beaten down, recognizing that it was potentially a value trap, but you saw actually probably a better value play. So far, it seems to be working out well.

Frankel: Oh, for sure. Wells Fargo looked like it was heading for disaster at the end of last year. Not only was the bank facing all this regulatory scrutiny for all their past bad behavior, but it was really unknown whether or not they would have a bunch of defaults that they couldn't deal with. Because remember, Wells Fargo's the most consumer-facing of the four big banks.

Moser: Yeah.

Frankel: But it looks like they've avoided a worst-case scenario, which is really why they've performed so well. The numbers look pretty solid. They are actually one of the few banks to increase revenue in the second quarter, year over year. A big reason for that is they released a lot of their loan-loss reserves. I mentioned they were really worried about increasing credit losses. That didn't really materialize. They were able to release $1.6 billion in the second quarter.

Moser: Nice.

Frankel: That really fueled their earnings, fueled their return on equity, things like that. Non-interest income is up 37% year over year because of that reserve release. Net interest income was down 11% year over year, which is pretty bad. I mentioned interest rates went to record lows. Most consumer-facing bank in the business. What happens? Lower net interest income.

Moser: Yeah.

Frankel: As far as news stories, they've been under the microscope lately. There's really no way to put that nicely. Elizabeth Warren recently asked the Fed to break up Wells Fargo.

Moser: Wow.

Frankel: They're doing a good job of moving on and going with the flow. They announced a new credit card product recently, announced that they're going to really focus on their digital strategy, which is something that they had not been doing very well under previous administration. So I'm still positive on Wells Fargo, but that's going to be an interesting quarter to watch, see how they do.

Moser: What about Citibank? You get Citigroup here reporting. The stock has done OK, I'd say, so far this year. It's the laggard of the bunch, though, just kind of matching the market, pretty much. What will you be watching out for there?

Frankel: Well, they had by far the worst revenue decline in the second quarter of the big four. Revenue was down 12% year over year. A lot of that was because of much worse weakness than expected in trading revenue, especially in fixed-income trading. Remember, Citigroup is one of the banks where a lot of their revenue is in investment banking. But just like the other banks we saw, deposits up in retail banking. Deposits were up 70% year over year. Loans were actually up 3% year over year in Citi's retail division, which kind of went against the trend.

And Citi, I think even more so than JPMorgan Chase, is a credit card-dependent bank. I know, for example, they are American Airlines' partner. Citi is, I believe, Costco's retail partner, which is a big account. Citi issues a lot of big -- Best Buy. My Best Buy card is issued through Citi. They're the retail partner for a lot of major credit card operations. Costco alone, I'm pretty sure, is bigger than Amazon's credit card partnership, because it's the only card they accept there.

Moser: That's a big one.

Frankel: It's a big one. I'm really curious to see how their credit losses are holding up. Remember, I said the big industry trend is credit losses were down across the board. I want to see if that holds up. But all in all, Citi, they have a lot to gain if things start going well in the economy.

Moser: What about Goldman Sachs on Friday, talking about investment banks? And, I mean, clearly this is one that is very levered to that market. I mean, also the relationship with Apple, of course. What's your take on Goldman?

Frankel: Well, remember, Goldman's still primarily an investment bank. Their consumer division is growing quickly. That's their Apple card. They took over GM's card business, a few others. Goldman is primarily an investment bank, and their first half was one for the record books, literally. They had their record revenue in the first half. They had the second best revenue of all time in the second quarter, only second to the first quarter. so they're having a phenomenal start to the year. They are trading for something like 12 times their first-half earnings. That's an incredibly low valuation -- 27% return on equity in the first half. Their investment banking revenue was just off the charts. It was kind of a positive perfect storm for investment banking. M&A activity was kind of off the charts, IPO activity was off the charts, and there was a lot of market volatility, which was great for their trading operations. So they just kind of got the best of all worlds. Their assets under supervision are higher than they've ever been -- more than $2.3 trillion. So Goldman's just really been firing on all cylinders.

So I don't think they're going to have a record third quarter. The M&A activity wasn't really as high as it had been in the first half. IPO activity kind of dropped off a little bit. The SPAC boom died out. That's where they've made a lot of their investment banking money in the first half. So this is one that I'm most curious about out of the five, just because it's the most unpredictable. Trading revenue is inherently kind of unpredictable. And then you have all the other parts of their investment banking business that are, really, it's tough to say how badly the M&A part got hit, for example, or the IPO, the equity underwriting, that part of their business. How badly that got hit. There's a lot of moving parts, and they're all really unpredictable.

Moser: Well, let's turn our attention to the upcoming quarter here. Starting on Wednesday, we're going to get a slew of reports. Let's take a take a forward-looking perspective here and talk a little bit about big picture. Generally speaking -- we're not going to go one by one through each bank -- but generally speaking, what are some of the big-picture trends you're looking out for? What are you expecting?

Frankel: For one, I want to see how all these loan deposits and all that -- how these numbers compare to a more normal quarter. The second quarter of 2020 was not normal. That was when the world was kind of, like in complete disarray and no one knew what to make of the pandemic. So the second quarter of 2021 wasn't the best comparison year over year. So you're going to see a more apples-to-apples comparison when it comes to things like loan growth, deposit growth or decline.

I'm also looking at the effective interest rates, because interest rates have started to tick upward in the past few months. That's one of the big reasons that the tech sector has performed so poorly. That can be a positive for banks. I want to see if net interest income might have, not normalized, but has ticked upward a little during the third quarter.

JPMorgan and Citigroup, I'll be watching the credit card business pretty closely. I want to see the charge-off numbers, if they keep heading in the right direction or if there's something to be concerned about. I think we might actually get a few more reserve releases this quarter. Remember that was a big trend in the second quarter.

I want to see what the CEOs have to say about the office return. Because if you remember the banking sector, all these CEOs were the most gung-ho out of any industry about the return to the office. Jamie Dimon, especially, said I want my employees in the office. Then they all ended up delaying their office return because of the delta surge. So I want to see what they have to say about that.

And I want to see what's going on with trading revenue in just investment banking in general. Because like I just mentioned with Goldman Sachs, it's probably the least predictable part of these. So that's what I'll be watching.

Moser: Yeah. One thing I was thinking of too, and it's just because we've seen this word so much lately running throughout the financial headlines, it's inflation. I mean, inflation, something that we're hearing more about and we talked about it on the show, clearly, of course. I just went back through each transcript for these five banks to see, last quarter, what was the language like for inflation? Were they talking about it even, or was it a point of focus? And if you look through these calls, it was really interesting. Goldman Sachs, the word was mentioned three times. Citigroup, it was mentioned two times. Wells Fargo, the word "inflation" was never even mentioned on the call. Granted, I think they probably a bigger fish to fry than that. Bank of America ,just once. But here, this was kind of fascinating: JPMorgan, 14 times. That was an outlier there.

But I feel like maybe with JPMorgan, maybe you feel differently, but if I look at all of these banks, of these five to me, the JPMorgan call is the one that I get the most information from. That's the one I value more than any of the others. It feels to me like they talk just a bit more about big-picture stuff than perhaps the other ones that are a bit more, like you said -- I mean, you've got Citi, which is credit card-specific, Goldman, a very investment banking-focused. JPMorgan seems to be a little bit of it all, and maybe that's why that's the case.

Frankel: Yeah. It's like, Jamie Dimon's calls are kind of like Warren Buffett's in the sense that no one listens to Buffett's report -- no one listens to Buffett's call to hear what he thinks about what Berkshire Hathaway's doing. They listen to him because they want to know what he thinks about the market in general, or, like you said, inflation, or any of these other things. So yeah, Jamie Dimon is the most relevant regardless of what stock you're invested in. I mean, I pay close attention to Bank America since it's one of my big positions. But JPMorgan, it's relevant to all investors, even if you're not really interested in banks, because it's that insightful, just on what's going on in the economy in general.

Moser: Well, that's a lot of good stuff there, Matt. I think our listeners will agree as well. Of course as always, thank you so much for taking the time to dig in and jump on the show today. It's not my guest. He's my friend. He's my partner in crime. [laughs] He is Matt Frankel. Thanks again, Matt.

Frankel: Of course. Always good to be here.

Moser: That'll 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 [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.