American Express (AXP) Q3 2021 Earnings Call Transcript
AXP earnings call for the period ending September 30, 2021.
Banks can seem like rather complicated businesses, and in many ways they are. However, the basic ideas behind the banking industry and how these businesses make their money are easy to understand. With that in mind, here's an overview of the different types of banks, some important metrics investors should know, and three great beginner-friendly bank stocks to keep on your radar.
Obviously, these are simplified definitions. Banks have many other ways to generate revenue. For example, many banks offer safe deposit boxes for lease to their customers, and some make money through partnerships with third-party companies. However, at their core, these are the main ways that banks make their money.
Hundreds of banks trade on the major U.S. exchanges, and they come in various sizes, geographic locations, and focuses. While there are some excellent choices in the investable universe, here are three beginner-friendly bank stocks that could deliver excellent returns for years to come:
Bank of America has been one of the most impressive turnaround stories in the post-financial-crisis era, even as falling interest rates put pressure on its profitability. In recent years, the bank increased its loan portfolio at rates well ahead of its peers, and the company has made major improvements in efficiency while building out its online and mobile technology. Bank of America's asset quality is excellent, and with a relatively high concentration of deposits that don't pay interest, the bank is in a strong position to benefit if and when interest rates rise.
JPMorgan Chase is hands down the most profitable of the big universal banks, and it’s also the largest bank by market capitalization in the U.S. The bank has operations in just about every area of both commercial and investment banking, and it has done a particularly great job of expanding its credit card and auto loan businesses in recent years. JPMorgan Chase has also done an excellent job of embracing new technologies, and it has made some key investments in financial technology, or fintech, companies.
U.S. Bancorp is primarily a commercial bank, with income from loans and other consumer banking products making up virtually all of its revenue. Not only is U.S. Bancorp (known to most Americans as U.S. Bank) focused on consumer banking, it consistently produces some of the most impressive profitability and efficiency metrics in the sector and has been an excellent dividend stock for investors. Because it doesn't depend on investment banking, which is generally the more volatile side of the banking business, U.S. Bancorp's profitability and revenue tend to be more predictable and consistent than the other two banks on this list.
If you're looking to invest in individual bank stocks, here are a few metrics that you might want to add to your toolkit:
Banks can be a great place to invest, especially in strong economies. When consumers are confident to spend and unemployment is low, profits tend to grow and loan defaults are typically kept in check. On the other hand, banks tend to perform quite poorly during recessions and other uncertain times. In investing terms, this means banks are a cyclical business.
There are a few reasons banks tend to perform poorly during recessions and other difficult economic climates. For one thing, they could face a wave of loan defaults if unemployment rises. Second, consumers tend to pump the brakes on spending during recessions, which leads to lower demand for loans. Finally, interest rates tend to decline during tough times, which is bad news for banks' profit margins.
It’s also worth mentioning that some parts of investment banking -- specifically trading and underwriting -- tend to do better in turbulent times. Banks such as JPMorgan Chase and Goldman Sachs (NYSE:GS) that have large investment banking operations could be helped by this, while banks that largely focus on commercial banking, such as Wells Fargo (NYSE:WFC), could be at a temporary disadvantage.
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett is known as one of the best stock investors of all time, and for good reason. During his 55 years at the helm of the company, Buffett has delivered annualized returns more than double those of the S&P 500, and the investments he’s chosen for Berkshire’s massive stock portfolio over the years are a good reason why.
If you take a glance at Berkshire’s stock portfolio, you’ll notice one major trend -- Buffett owns quite a few bank stocks. Berkshire owns stakes worth $1 billion or more in four different bank stocks, including a very large stake in Bank of America.
While it’s not necessarily a smart idea to buy any particular stock just because a billionaire owns it (even Warren Buffett), there does appear to be some value in the banking industry in 2021. So, if you don’t have much exposure in your portfolio, one or more of the rock-solid banks discussed here could be a good fit for you.
At their core, banks make their money in two main ways -- commercial banking and investment banking. Commercial banking refers to the banking products and services that banks provide to individuals and businesses. Investment banking refers to services a bank provides to corporations, governments, high-net-worth individuals, and other entities that go beyond those commercial banking activities.
The short answer is yes. Bank stocks are generally affected by recessions for a couple of reasons. First, interest rates tend to fall during recessions. Second, and more important, unemployment tends to rise during recessions, and more consumers run into financial trouble.
However, the longer answer is that every bank is different. Consumer banking (taking in deposits and lending money) is highly cyclical, and this is especially true for banks that specialize in riskier forms of lending such as credit cards. On the other hand, investment banking tends to do even better during turbulent times, so banks that have large investment banking operations tend to see profits hold up quite well.
When trying to analyze a particular bank stock, it's a good idea to focus on four main things:
AXP earnings call for the period ending September 30, 2021.
Management at the bank talked more about the bank's strategic vision over the next few years.
JPMorgan Chase was led by strong M&A activity, and its balance sheet has it positioned well for what could come in the next few quarters.
The company blew out earnings estimates in Q3, as it has done all year.
Capital One Financial is up big in 2021, but it remains a good value.
The stock has seen volatility in recent months, but Q3 earnings continue to show that the bank is on the right path.
Citigroup repurchased about $3 billion of its own stock in Q3, which was less than investors had anticipated.
There are no reasons to ever part ways with these thoroughly dominant businesses.
Here's a recap of the big banks' second-quarter results and what we're watching now.
Bank of America shares rose nearly 5% after it reported third-quarter results on Oct. 14.