Earnings season is now underway, and we've seen the latest numbers from all of the big U.S. banks. In this installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss third-quarter results from JPMorgan Chase (JPM -0.10%), Bank of America (BAC -0.26%), Wells Fargo (WFC -0.02%), Citigroup (C 0.39%), and Goldman Sachs (GS -0.26%). Hear which bank had the best quarter, and what stocks Jason and Matt are keeping an eye on this week. 

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This video was recorded on Oct. 18, 2021.

Jason Moser: [MUSIC] It's Monday, October 18th. I'm your host, Jason Moser. If you caught last week's Financials show, then you heard our earnings preview for the big banks. This week, we're jumping into what they all had to say with our earnings review here to make sense of it at all. It's the one, it's the only certified financial planner Mr. Matt Frankel. Matt, how is everything going?

Matt Frankel: Just fine it's a nice, sunny and not-too-hot day in South Carolina. You only get a few of those before winter, our fall is like a week long.

Moser: It's contagious, it's throughout that way up here to Virginia, it's really nice sunny day, cool outside seems like it's really starting to turn into fall, which I think we're all kind of happy about. You get some Halloween decorating done over the weekend. My kids are very proud of what I put out there this year.

Frankel: Our house is all decorated and we have a golf cart, so one of my kids' favorite things to do this time of year as drive around the neighborhood on the golf cart looking at all the decorations. [laughs]

Moser: Nice, good deal. Well, Matt, we were talking last week about all of the banks that we're getting ready to announce earnings as earnings season has gotten underway here. We wanted to circle back this week and then take a look at these reports and see if there were any underlying themes and just generally see how these banks are doing. It has been a much different year, I would say, this year versus last for these big banks. We're having a very good year to date for the most part and a good trailing 12 months, too when you look at the performance for these big five. Let's just go in order here. We'll take JPMorgan first because they announced last Wednesday. What stood out to you in JPMorgan's report? We're always paying a little bit, I think closer attention because of Jamie Dimon, but what's stood out to you in JPMorgan's most recent quarter?

Frankel: There are a few common themes among all of these earnings reports, they were all generally good first of all. All five of the banks we're going to talk about beat earnings expectations, which is pretty impressive. There were a lot of reserve releases, which is one of the things we mentioned in the preview show last week if you remember. Banks have more visibility into their loan losses now, now that COVID is, I don't want to say winding down, but definitely we're moving on with life in general.

Moser: We're in a much different place now than we were before and it's much better situation for sure.

Frankel: Right. Just to run down JPMorgan, they had a $2.1 billion reserve release. The reason I'm mentioning that first is because that was a big part of its earnings beat. It beat expectations and it earned $3.74 a share versus $3 EBITDA was the expectation. But over $0.50 of those earnings were in the form of a reserve release. The beat wasn't as good as it sounds, but it was still more than expected. Revenue grew 2% year over year, which is nice considering that interest rates are still pretty low. Revenue came in higher than expected. Jamie Dimon who you mentioned, gave his thoughts on the economy and said he is really impressed with the economic growth despite the delta variant making us go backward a little bit during the third quarter. I would call the second quarter really the reopening quarter of the year. Whereas the third quarter, I don't want to say it was a shutdown quarter, but things definitely took a pause a little bit in terms of reopening in August and September.

Moser: Yeah.

Frankel: Interest income was actually better than expected, which is really nice to see. Net interest income came in about $200 million more than expectations called for.

Moser: Wow.

Frankel: Which remember, interest rates are still pretty low. They started to pick up during the third quarter, but still very low historically. In the investment banking side of it, investment banking revenue was up 50% year over year.

Moser: Yeah.

Frankel: That's strong M&A and IPO market that we mentioned during the preview. One potential negative, JPMorgan was the only bank that missed on some of its trading revenue and investment banking. They missed on the fixed-income side, they came in well below expectations. They beat on the equities trading sides, so that kind of evened it out, but still something to watch. We've talked about it many times, how trading revenue is like the least predictable type of banking income. But in general, overall loan portfolio is up 5% year over year. Jamie Dimon called the loan growth "stabilized," which is nice because remember, loans were declining for a little while there. Deposits are up 19% year over year. Overall, really good quarter.

Moser: Yes. The deposit number, we'll talk, I think, a little bit about that with the Bank of America as well. That's one of those things that can help, I think, that net interest income because typically, there was this higher deposits which were essentially zero-interest deposits for the most part. That gives them a little bit more to work with, so to speak, they're bringing in a little bit more than they have to pay out on that slide. One thing I noticed, and I want to just get your quick feelings on this, there is a question on the call in regard to the supply chain disruptions. I mean it's not just semiconductors, that's virtually everything. We're hearing, you better get holiday shopping now. We're seeing Amazon, Walmart, Target, they're all going to start rolling out these holiday shopping promotions early. Dimon seems to think, listen, he didn't think we are going to be talking much about these stuff in a year. Then maybe we are focusing on it a little bit too much right now that it's dampening a fairly good economy, not reversing a fairly good economy. Do you feel like maybe he's a little bit blasé about this? He kind of just glosses over it, but I mean, I don't know, it seems to me like he's not as concerned with it or he certainly feels like there are others out there who remain concerned this could well into next year.

Frankel: I feel like the supply chain disruptions have already lasted longer than a lot of people thought. The holiday season it could be interesting and it's not just supply chain, it's a labor shortage, too. What happens every year around the holiday season, companies like Target and Amazon, hire tens of thousands of seasonal workers. They're going to have trouble doing that this year. You're not only going to have competition for products, but you're going to have bigger crowds than these stores' employees can handle in a lot of cases. That's something to watch, too. But I see it clearing up early in 2022. I agree with him on that point.

Moser: Good enough. Well let's move on to Bank of America. Again, I know this is a bank that you follow closely, a bank you like, it seemed like it was a pretty good quarter.

Frankel: Yeah. I'm going to sound like a broken record in some of these just because [laughs] I always age myself with that phrase, broken record. Most people listening don't know what a record is.

Moser: Vinyl's making a come back. [LAUGHTER] Want's some little piece vinyl.

Frankel: Broken record is something that repeats itself for young ones out there. [LAUGHTER] Bank of America beat on both earnings and revenue. They beat expectations on both. Earnings were up 58% year over year, which is really nice because remember there weren't these big reserve releases last year, things like that. It was more going the other direction, banks were setting aside money in anticipation that things were going to get bad. Bank of America released $1.1 billion in the quarter. Not quite as much of a reserve release as JPMorgan, but still over a billion dollars. A billion is a billion. Net interest income grew 10% year over year, which was nice to see, given that the interest rates, like I mentioned, are just starting to tick up, which was much better than expected. Annualized loan growth is up 9% quarter over quarter. I think that was the best out of the big banks. Their loan portfolio is growing nicely led by commercial lending, which was nice to see. Meaning companies are willing to borrow and spend money more than people thought. Investment banking fee incomes up 23% year over year. Advisory revenues, M&A, and equity underwriting, which is IPOs, were the strongest parts. That part was up 65% year over year and they beat their trading revenue which is, like I've said, notoriously tough to predict, beat on both the fixed income and the equity side, unlike JPMorgan Chase. Really solid quarter if I were to give JPMorgan a B for the quarter, I'd give Bank of America probably a B plus or A minus.

Moser: One thing that stood out to me, they have 41 million customers now using their digital platform, which I'll just tell you from the perspective of one of those 41 million and we've been Bank of America customers for a long time, one of the reasons we are Bank of America customers, frankly is just a headache trying to switch banks. But, even if I wanted to, which we don't, I think that's the key there is that we really have no reason to. The service is good. We think the digital platform is good. It just feels like that's such a sticky form of engagement that will keep people in that universe. It really is very user-friendly digital platform, which to me it feels like they're only going to continue to make those investments and grow that capability up.

Frankel: Well out of the five we're talking about, I feel like Bank of America took the lead on investing in technology.

Moser: It feels to me that way as well. Yeah.

Frankel: I'm a Wells Fargo customer and Wells Fargo has a nice, user-friendly app and platform. I use Bank of America for our business account related to my real estate investing. It's a better platform, it just is. It's more user-friendly and you could tell that they spent the money.

Moser: Yep. Indeed. Speaking of Wells Fargo, it feels like things are slowly but surely coming back online for them. Stock continues to have a good year and it feels like this was a pretty good, maybe nothing terribly noteworthy, but it felt like it was pretty good quarter, it kept them going in the right direction.

Matt Frankel: Yeah, it was a strong quarter. Like I said, I would've given JPMorgan a B, I would've given Bank of America probably a B plus or A minus, Wells Fargo will get like a B minus to a C. Not a bad quarter, but like you said, nothing terribly great. They beat earnings expectations, most of that was because of a reserve release. They released $1.65 billion. Remember, Wells Fargo is the most consumer-facing out of the five, meaning they're not really focused on the investment bank. They loan money, that's how they make their money. Net interest income was down 5% year over year. Remember I mentioned Bank of America's was up 10%, so their interest income is trending in the opposite direction, which is concerning. That's probably the biggest ding on the quarter. One thing that's really impressive, they spend $5.3 billion on buybacks in the third quarter alone.

Moser: Wow.

Frankel: That's an aggressive buyback pace.

Moser: That is.

Frankel: I don't have the figure in front of me, but I want to say Wells Fargo's total market cap is in the $200 billion range.

Moser: Yeah, that sounds about right.

Frankel: That means say they bought back more than the 2.5% of their share count in the third quarter alone.

Moser: Yeah, $193 billion I'm seeing right now on Capital IQ.

Frankel: That's a big buyback pace.

Moser: It is.

Frankel: Consumer loans still down year over year, down 2% from the second quarter. Not terribly concerning about in line with peers. Deposits continue to rise and Wells Fargo's nicely profitable, that return on equity of 11.1%, which is above that magical 10% threshold. Strong quarter but nothing to jump up and down in the street about.

Moser: Do you feel like the headwinds that they're facing in on the net interest income side, you feel like that's partly due to the fact that regulators are still keeping the growth lid on, so to speak. There's still not able really to grow. You're not going to bring those deposits. We see with JPMorgan and Bank of America for example, there's robust deposit growth numbers. Wells is going to be limited in what they can do there. You feel like that's something that plays into that net interest income. If so, then it feels like maybe that's a bit more of a short-term concern as opposed to a long-term one.

Frankel: Absolutely. When their peers are growing their deposit base at 20% year over year, like in some of these cases. JPMorgan's was up 19% year over year. Wells Fargo's was up less than 4% year over year.

Moser: Yeah.

Frankel: When you have that big difference in deposit growth, of course, it gives the other banks an advantage to generate more interest because it gives them more money to lend. Even if their loan portfolio is not necessarily growing as fast as they like it to, it still gives them that big capital base to lend out and make money, so Wells Fargo, that's definitely a handicap for them right now.

Moser: Do you think going forward that these banks and I'm going to pick on Bank of America and JPMorgan and Wells specifically here, just because these numbers are so large. These reserve releases and there are no surprise we've been talking about them for a year, waiting for this to essentially happen. It feels like though they're going to have to wean themselves of that crotch. Again, I don't know how much more they can release in order to impact the bottom line, so to speak, it feels like going forward, maybe there's going to be a little bit more of a burden on these banks to start growing again. They are going to certainly need to see that interest rate environment improve a little bit, but it feels like they can't rely on these reserve releases much longer. What about Citigroup stood out to you this quarter, Matt?

Frankel: It was nice, it was a good quarter. Nothing terribly impressive. Their loan portfolio was flat year over year, except you have nothing really to report there.

Moser: Right.

Frankel: Pretty strong deposit growth. Middle of the pack, 7% year-over-year deposit growth. Earnings came in ahead of expectations, were up 48% year over year. Revenue beat expectations, both sides of trading beat expectations. They're the only major bank with a return on equity below 10% though, they're at 9.5 right now and their overall revenue declined by one percent year-over-year. Not a fantastic quarter, but another one I would probably give a C to.

Moser: That's a pretty card-heavy bank isn't it? That's more card exposure than the others.

Frankel: They are very card-heavy bank and they're a very international heavy bank.

Moser: Yeah.

Frankel: I know they have the most international exposure out of any of the five banks we're talking about. That's something that's also been weighing on them. If you're an international bank and a lot of these international markets have been hit much worse than the U.S. in the past year or so. They rely on international commerce which is at a disadvantage right now.

Moser: Yeah. Absolutely.

Frankel: I'd give it a C. Nothing great, nothing too bad.

Moser: Goldman Sachs wrapped it up for us on Friday morning when they announced their quarterly results. I mean, clearly Goldman is a more investment banking centric idea there. Now, we can't hold that against them because it looks like investment banking revenue for Goldman did pretty darn well this past quarter, Matt.

Frankel: Yeah. They had a pretty strong quarter. Earnings up 63% year over year and that's not due to reserve releases. That just because their business is making tons of money. Revenue grew 26% year over year. Goldman trades at 7.5 times trailing-12-month earnings right now. 7.5 times earnings. Not many stocks in the market can do that.

Moser: No. [laughs]

Frankel: Investment banking revenue, you mentioned up 88% year over year. They beat expectations pretty much across the board throughout their business. They're trying to pivot away from investment banking. Remember, they are building out their credit card business, they have the Apple Card, they have some General Motors credit card business.

Moser: Yeah.

Frankel: They are acquiring a fintech render called GreenSky that should close in the first quarter of next year. That part of the business, it's still just a small part of the total, just doing the quick math in my head, it's about 15% of the business, the consumer and wealth management division. But it's growing fast, it grew 35% year over year, specifically on higher loan balances. All these other banks, their loans were flat, they were down year over year. Goldman's are growing. They're building up the credit card business aggressively. They're doing it in the right way, I mean, Apple's customer base are pretty desirable one to bring into your ecosystem. Goldman Sachs, there's really nothing bad to say about the quarter. One thing I would point out is that Goldman Sachs tends to thrive in unusual times.

Moser: Yeah.

Frankel: 2021, so far through the first three quarters has been the most they've earned through three quarters in their history. But the previous record was in 2009, when we all remember what was happening in 2009, that's when they made the most money before this because it was a very volatile environment. Their investment banking business does well when companies need to raise capital, when there's a lot of trade, when there is a lot of uncertainty, which is great for trading, not necessarily IPOs, but when companies are making fire sale acquisitions, which we saw a ton of in 2009. Some of these banks made big acquisitions in 2009, and Bank of America acquired Merrill Lynch and Wells Fargo bought Wachovia, things like that are great for investment banks who facilitate those deals. 2021 has been an unusual year, both in terms of IPO volume. Remember, there has been like something like 500 SPACs or loan that have gone public in 2021. It's been an unusual year, it's been a volatile year, both in good and bad ways and Goldman tends to thrive in those environments. It's unclear how much of their earnings growth is transitory and how much is permanent at this point. But other than that, there's not a whole lot negative to say.

Moser: That's a really good point. I mean, you look at the way the company has performed thus far this year, they've grown book value so 17.4% year to date so to your point, yeah. I mean, they're thriving in the uncertainty and that uncertainty just creates a lot of business for them and it feels like that's the way the rest of the year is going to shake out and certainly could be into 2022 as well, but I guess we will have to wait and see. Matt, you were offering some grades along the way and I wanted to get your thoughts on if you look at all five banks and these are banks that you follow closely, you and I talk about these companies a lot. Just based on this most recent quarter, if you had to deem one of these five the winner who won earnings season of the five banks this year?

Frankel: I have to give Goldman Sachs an A.

Moser: Really?

Frankel: With the asterisk that this is not a normal year, that this is a great environment to be a pure investment bank. With that, I'm going to make a bold prediction and say that Goldman Sachs will be $1,000 stock within five years.

Moser: Wow.

Frankel: Well, I'll actually walk that back and say, I think Goldman Sachs should be $1,000 stock today.

Moser: [laughs]

Frankel: That would put it at about 22 times earnings which really isn't much of a stretch when you look at the rest of the market.

Moser: It feel like it wouldn't be.

Frankel: If it turns out they can keep growing their consumer business as they have been and it looks like their investment banking division maintains its lead, I think this could be their time. That's a stock that has not historically gotten the market's love. They had a negative stigma attached to their name for the longest time. They're really trying to renovate or reinvent themselves with their consumer banking division, which they're doing a fantastic job of. I think Goldman Sachs is going to be a big performer, especially as interest rates rise, right now they're building their consumer banking division into a low interest environment.

Moser: Yeah.

Frankel: As rates rise, I think they could be a big winner in that too. There's a lot to like about it.

Moser: This past week's Motley Fool Money, Chris Hill asked me that very same question, I was going over these banks for the show. It's interesting you went with Goldman because I was noodling between two. It was Goldman and Bank of America. Now, I ended up calling out Bank of America as my winner, really I felt like revenue growth, 12%, 15% boosted deposits. I mean, that record investment banking net and there's just a lot to like about the quarter. I figured man, when I was picking Bank of America that Matt Frankel will be proud of me for doing this. There you go picking Goldman so oh, well.

Frankel: It's tough to make an argument against Bank of America.

Moser: [laughs] I'm just giving you a hard time. I agree. To me, Goldman and Bank of America stood out as real two winners there. I think you're absolutely right Goldman has a lot going for it, so wouldn't shock me to see them continue that success. Matt, before we wrap it up this week, let's give our listeners a couple of financial related companies here, banks or otherwise, with some earnings coming up. What's the stock that you are watching this coming earnings season?

Frankel: Can I say all of them?

Moser: Sure [laughs] if you want. You got to give you a thesis for each.

Frankel: Well, I mentioned that I'm watching SoFi very closely this quarter and I'm going to be watching a lot of these real estate stocks. I don't know if you saw the news today that Zillow is stocking their iBuying business for the rest of the year.

Moser: I did see that.

Matt Frankel: I want to see if companies like Opendoor with ticker symbol O-P-E-N are having similar issues. They're stopping it because it's going so well. They're too big of a backlog. I want to see if their rivals have a similar thing going. I'll be watching all the iBuying businesses, Zillow, Opendoor, Redfin, etc.

Moser: Sounds good.

Frankel: I guess that counts as financials, real estate used to be in the financial sector.

Moser: We talk about real estate all the time on this show. It absolutely counts. We deem it as worthy on this show for sure. Good. Matt, I'm going to be jumping on a plane on Thursday and I'm flying down to Georgia, flying to Atlanta, drive down to Moultrie, go see my folks for a few days, playing my dad's membered guest down there and so in honor of going down to Moultrie, Georgia, this weekend, keeping an eye on Ameris Bank or I'm sure in Sherman, talk to a couple of the guys down there. But the stock has had a good year up 36%, year to date, up 100% over the last 12 months actually. I am interested to hear their take on commercial real estate, particularly given the fidelity deal that closed back in the middle of 2019. We were talking about Goldman Sachs growing that book value and Ameris continues to grow tangible book value as well noted the last quarter was growing at an annualized rate of 20% for the year. Our earnings for Ameris are out on Oct. 28 and I will be very interested to see what they have to say. Until then, Matt, I think that's going to do it for us. I appreciate you taking the time to go through all these earnings reports and give us your thoughts today.

Frankel: Well to talk about some of the smaller banks that are set to report this coming week like Ameris and some of the others. They're always fun to watch because they have different dynamics than the big banks in terms of regulation and stuff like that.

Moser: Absolutely. Look forward to it. As always folks, you can reach out to us on Twitter at MF Industry Focus, 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. 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.