by Tajinder Dhillon.
Banks unofficially kicked off 19Q3 S&P 500 earnings season. The ‘big six’ finished reporting earnings (JPMorgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley). As a group, earnings growth rate declined 0.7% YoY, while revenue growth increased 2.3%.
Goldman Sachs led the decline with earnings and revenue growth of -23.7% and -3.7% respectively. Investment Banking revenues were down 15% YoY, while Financial Advisory revenues were down 22% YoY, but sentiment on future M&A activity was positive, particularly in health care and natural resources. “The operating environment in the third quarter remained mixed and slowed the pace of activity by many of our corporate clients. During the quarter, trade war concerns contributed to a risk-off sentiment and sharply lower global interest rates. Markets were also impacted by turmoil in Argentina, Brexit headlines in Europe and a temporary spike in oil prices in September. Throughout the quarter, responses from central banks, including the Federal Reserve and the ECB, remained accommodative, supporting both capital markets and the sustainability of global economic growth.” (David Michael Solomon, Chairman & CEO).
Wells Fargo and Bank of America also both experienced double-digit declines in earnings growth of -18.6% and -15.2% respectively. Revenue growth was flat at 0.3% and 0.1%.
Wells Fargo suffered $1.9 billion of operating losses predominantly reflecting litigation accruals around prior retail sales practices. However, management indicated that retail activity is looking strong with an increase in both deposits and loans throughout the quarter. Customer loyalty and in-branch visit satisfaction scores also reached a three-year high. Bank of America also suffered a $2.1 billion impairment charge related to a sale of a joint venture, but as with Wells Fargo, underlying deposit and loan growth was positive at 3% and 7% respectively.
JPMorgan and Citigroup were the winners in 19Q3 with earnings growth of 14.5% and 19.7% respectively alongside 8.1% and 1.0% revenue growth.
JPMorgan experienced strong revenue results in consumer banking and investment banking which was up 7% and 8% YoY. However advisory was down 13% YoY, reflecting lower deal activity compared to a strong prior year. Similarly, Citigroup global consumer banking revenue was also up at 1% YoY (4% on an adjusted basis), while investment banking revenues were up 4%. Citigroup continued to buy-back shares throughout the year, which lead to strong earnings growth, which can be seen in Exhibit 2.
Exhibit 2: Citigroup EPS vs. Shares Outstanding
Morgan Stanley who reported today provided the largest surprise out of the group, beating consensus earnings estimates by 14.3%. Earnings growth increased 8.5% YoY while revenues increased 1.6%. Investment banking revenues grew 4% QoQ, while advisory revenues grew 9% QoQ. Fixed income underwriting also grew 39% QoQ.
Looking ahead to the next 4 quarters (19Q4-20Q3), average earnings growth for the big six banks is expected to increase 4.2%, while revenues are expected to decline 0.7%. Concerns around trade, Brexit, and monetary policy are a going concern among banks while Goldman Sachs anticipate global GDP growth to be at 3.0% in 2020. JPMorgan states, “the U.S. economy is on solid footing. And while global growth is slowing, the U.S. consumer remains healthy.” (Jennifer A. Piepszak, CFO)