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Get ready for a good earnings season for big U.S. banks

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Bank stocks typically drop during recessions. This time around, with the big players well-capitalized, largely free from the worst of loan loss set-asides and benefitting from a rebounding economy, investors may be looking at an opportunity staring them in the face.

And the biggest banks have clear advantages: fees from investment banking and asset management. (Below are tables showing expected and historical provisions for loan losses, non-interest income, earnings per share and analysts’ ratings for the largest dozen U.S. banks.)

The hot space — asset management

Morgan Stanley
US:MS
 has been making moves to stay at the forefront of the asset-management club. On Thursday, the firm said it would acquire Eaton Vance Corp.
US:EV
 for $7 billion in cash and stock. Eaton Vance had $507 billion in assents under management as of July 31, and Morgan Stanley said the merger would bring assets under management for its Morgan Stanley Investment Management unit to $1.2 trillion.

Just on Oct. 2, Morgan Stanley completed its acquisition of discount broker E-Trade Financial. At that time, the bank said the firm’s total assets under management (AUM) had risen to $3.3 trillion. That makes for a pro forma total of $3.8 trillion in AUM, assuming the Eaton Vance acquisition is completed following regulatory approval.

A Twitter posting from Stephanie Link of HighTower Advisors underlined how hot the asset management business is:

Maybe this shouldn’t be a surprise, considering the asset bubble fueled by the Federal Reserve’s nearly $3 trillion increase in the money supply (M2) this year.

‘We recommend buying the Morgans’

Even before Morgan Stanley’s latest asset-management splash, David Konrad, a managing director and senior research analyst at D.A. Davidson, wrote in a report on Oct. 6: “We recommend buying the Morgans.”

His “top idea” is Morgan Stanley because of its mix of businesses, strong level of capital and the addition of E-Trade. He wrote that J.P. Morgan Chase & Co.
US:JPM
 “should regain its multiple” because of increasing revenue, lower credit costs after a brutal first and second quarters, and “increased visibility on its dividend.”

Konrad prefers JPM to Bank of America Corp.
US:BAC
as a long-term investment because it “offers better fee-income growth through market-share gains in capital markets,” and because of higher returns on capital and a more attractive valuation to the shares when considering its greater returns.

Konrad has neutral ratings on BAC and Goldman Sachs Group Inc.
US:GS,
while rating Citigroup Inc.
US:C
 a “buy,” despite investors’ frustrations with the stock, in part because “both Citi and JPM have meaningfully higher reserve to loan ratios than BAC.”

You can see in the last table below that sell-side analysts as a group have the highest percentage of “buy” ratings for Citigroup and expect its stock to increase the most over the next year among the 12 listed here.

Provisions and reserve coverage

A bank’s quarterly provision for loan-loss reserves is the amount it adds to loss reserves to cover expected losses on loans and leases. Yes, it is moving money from one bucket to another, but it directly lowers earnings.

Here’s a summary of consensus estimates for third-quarter provisions among analysts polled by FactSet, compared with actual provisions over the past four quarters, for the largest 12 U.S. banks. The figures are in billions, and you will need to scroll the tables in this article to see all the data:

Bank

Ticker

Estimated provision for loan loss reserves – Q3 2020

Provision for loan loss reserves – Q2 2020

Provision for loan loss reserves – Q1 2020

Provision for loan loss reserves Q4 2019

Provision for loan loss reserves Q3 2019

Total assets – June 30, 2020

J.P. Morgan Chase & Co.

US:JPM $2,885

$10,473

$8,285

$1,427

$1,514

$3,213,115

Bank of America Corp

US:BAC $2,236

$5,117

$4,761

$941

$779

$2,741,688

Citigroup Inc.

US:C $4,004

$7,903

$6,446

$2,197

$2,071

$2,232,715

Wells Fargo & Co.

US:WFC $1,921

$9,534

$4,005

$644

$695

$1,968,766

Goldman Sachs Group Inc.

US:GS $550

$1,590

$937

$336

$291

$1,141,523

Morgan Stanley

US:MS N/A

$246

$292

$0

$0

$975,363

U.S. Bancorp

US:USB $806

$1,737

$993

$395

$367

$546,652

Truist Financial Corp.

US:TFC $603

$844

$893

$171

$117

$504,336

PNC Financial Services Group Inc.

US:PNC $394

$2,463

$914

$221

$183

$458,978

Bank of New York Mellon Corp.

US:BK $40

$143

$169

-$8

-$16

$442,316

Capital One Financial Corp.

US:COF $2,160

$4,246

$5,423

$1,818

$1,383

$421,296

State Street Corp.

US:STT $18

$52

$36

$3

$2

$280,242

Source: FactSet

During a year of economic turmoil, quarter-to-quarter comparisons can be more important than year-over-year comparisons. So the table includes both, and you can see analysts expect the third-quarter reserve set-asides to be much less painful than they were during the first half of 2020.

In his own bank earnings preview report for clients, Odeon Capital Group analyst Richard Bove called third-quarter provisions “the most critical of any number produced in the quarter.” He expects “a relatively good set of numbers,” but warned that negative surprises would cause meaningful declines for the stocks, even from their current discounted valuations.

Bove cited a decline in commercial and industrial loans and “moderate growth elsewhere” as among the reasons provisions would decline, but also wrote that “it is beginning to appear that the banks may have over-reserved in the first half.”

Banks look ahead when setting aside reserves. It takes time for a loan to go through past-due cycles and be written-off. This means that third-quarter charge-offs will rise from the second quarter. But again, looking ahead, investors’ reaction to this bit of bad news may be mitigated by the lower reserve builds.

Non-interest income

Interest income is pressured this year because of the Federal Reserve’s bond-buying, which has pushed down long-term interest rates. Ten-year U.S. Treasury notes
BX:TMUBMUSD10Y
 yield a paltry 0.77%, down from an already low 1.92% at the end of 2019.

For Goldman Sachs, Morgan Stanley and J.P. Morgan Chase, a spike of bond issuance during the first quarter caused an increase in investment-banking income. For the three banks, third-quarter non-interest income is expected to decline sequentially but still be elevated from a year earlier. The figures are in billions:

Bank

Ticker

Estimated non-interest income – Q3 2020

Non-interest income – Q2 2020

Non-interest income – Q1 2020

Non-interest income – Q4 2019

Non-interest income – Q3 2019

J.P. Morgan Chase & Co.

US:JPM
 

$14,911

$19,127

$13,812

$14,165

$15,113

Bank of America Corp

US:BAC $10,476

$11,478

$10,637

$10,209

$10,620

Citigroup Inc.

US:C $6,501

$8,686

$9,239

$6,381

$6,933

Wells Fargo & Co.

US:WFC $8,266

$7,956

$6,405

$8,660

$10,385

Goldman Sachs Group Inc.

US:GS $8,789

$12,351

$7,430

$8,890

$7,315

Morgan Stanley

US:MS $9,338

$11,814

$8,131

$9,424

$8,814

U.S. Bancorp

US:USB
 

$2,504

$2,614

$2,525

$2,436

$2,614

Truist Financial Corp.

US:TFC
 

$2,004

$2,423

$1,961

$1,398

$1,303

PNC Financial Services Group Inc.

US:PNC $1,523

$1,549

$2,006

$2,121

$1,989

Bank of New York Mellon Corp.

US:BK $3,131

$3,221

$3,294

$3,963

$3,131

Capital One Financial Corp.

US:COF $1,157

$1,096

$1,224

$1,361

$1,222

State Street Corp.

US:STT $2,265

$2,378

$2,399

$2,368

$2,259

Source: FactSet

EPS estimates

Here are consensus estimates for third-quarter earnings per share, with comparisons of EPS for the previous four quarters for the group:

Bank

Ticker

EPS estimate – Q3 2020

EPS – Q2 2020

EPS – Q1 2020

EPS – Q4 2019

EPS – Q3 2019

J.P. Morgan Chase & Co.

US:JPM $2.22

$1.38

$0.78

$2.57

$2.68

Bank of America Corp

US:BAC $0.49

$0.37

$0.40

$0.74

$0.56

Citigroup Inc.

US:C $0.89

$0.50

$1.05

$2.15

$2.07

Wells Fargo & Co.

US:WFC $0.44

-$0.66

$0.01

$0.60

$0.92

Goldman Sachs Group Inc.

US:GS $5.28

$0.55

$3.11

$4.69

$4.79

Morgan Stanley

US:MS $1.24

$1.96

$1.01

$1.30

$1.27

U.S. Bancorp

US:USB $0.90

$0.41

$0.72

$0.90

$1.15

Truist Financial Corp.

US:TFC $0.81

$0.67

$0.73

$0.75

$0.95

PNC Financial Services Group Inc.

US:PNC $2.02

$8.43

$1.95

$2.97

$2.94

Bank of New York Mellon Corp.

US:BK $0.94

$1.01

$1.05

$1.51

$1.07

Capital One Financial Corp.

US:COF $2.08

-$2.21

-$3.10

$2.25

$2.69

State Street Corp.

US:STT $1.41

$1.86

$1.62

$1.34

$1.42

Source: FactSet 

So the 12 largest U.S. banks are expected to post profits for the third quarter, after provisions for loan-loss reserves led to losses during the previous two quarters for several of them. Those quarterly comparisons will be much more important than blind comparisons with the year-earlier figures.

Brian Kleinhanzl, managing director for large-cap banks at KBW, expects third-quarter earnings per share for the nine largest U.S. banks to be down 16% from a year earlier, but wrote that year-over-year declines have “slowed form the prior quarter.” He expressed caution, rating the group “equal weight,” as “near-term risks outweigh the long-term benefits that should emerge when the global economy recovers more meaningfully,” he wrote in a report Oct. 1.

Ratings and price targets

Here are ratings summaries and consensus price targets among analysts polled by FactSet for the 12 largest U.S. banks. Again, scroll the table at the bottom to see all the data:

Bank

Ticker

Share ‘buy’ ratings

Share neutral ratings

Share ‘sell’ ratings

Closing price – Oct. 7

Cons. price target

Implied 12-month upside potential

J.P. Morgan Chase & Co.

US:JPM 67%

29%

4%

$99.73

$115.51

16%

Bank of America Corp

US:BAC 59%

41%

0%

$24.88

$28.96

16%

Citigroup Inc.

US:C 81%

19%

0%

$44.84

$65.75

47%

Wells Fargo & Co.

US:WFC 28%

61%

11%

$24.81

$30.35

22%

Goldman Sachs Group Inc.

US:GS 62%

38%

0%

$203.60

$249.79

23%

Morgan Stanley

US:MS 73%

27%

0%

$48.71

$59.76

23%

U.S. Bancorp

US:USB 38%

50%

12%

$38.79

$43.19

11%

Truist Financial Corp.

US:TFC 63%

37%

0%

$42.03

$44.30

5%

PNC Financial Services Group Inc.

US:PNC 42%

50%

8%

$115.18

$119.85

4%

Bank of New York Mellon Corp.

US:BK 53%

42%

5%

$36.46

$43.68

20%

Capital One Financial Corp.

US:COF 69%

22%

9%

$78.24

$83.68

7%

State Street Corp.

US:STT 37%

58%

5%

$63.41

$71.76

13%

Source: FactSet

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My husband doesn’t get along with my son. I brought most of the wealth into our marriage. How do I split my estate?

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Dear Quentin,

How do couples typically handle their estates in a second marriage? My husband and I have been married for seven years, and it is the second marriage for both of us. I have one adult child from my previous marriage; he has no children.

I brought the majority of our wealth to our marriage, including almost $1 million in my 401(k) and a nice home that is almost paid off; otherwise, we have no debt. My husband and I bought a second home together. We work hard to fund our new 401(k)s, and own a successful business together.

I am turning 65 this year, so estate planning is long overdue. My husband is five years younger than me, and we are both in very good health. We have two issues facing us: I see our retirement as living very comfortably on the monthly income generated by our 401(k)s, pension, Social Security, etc., and leaving whatever may be left to my son.


‘The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him.’

I am not interested in scrimping, but I want to be able to have enough money to last us until age 90 (or beyond) by not touching the principal. My husband is more interested in dipping deep into our savings, and living it up in retirement while we are young enough to enjoy it.

The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him, to the point that neither one wants anything to do with the other. As far as he is concerned, my son doesn’t meet his expectations, and so deserves nothing from me and certainly nothing from him.

I want my estate planning to be fair to both my new husband and my son. How do people typically handle this type of quandary? I think that I need to create some type of trust to pass on my share of our estate to my son. My pre-marriage assets involved my son as I pursued my graduate degree through night school and worked long hours throughout his childhood.

Second Wife

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Second Wife,

Don’t allow your husband’s feelings toward your son to influence your estate planning.

Your relationships with your husband and your son and your own plans for retirement are all fair game when making decisions about your estate, but your husband and son’s fractured relationship is their business, not yours. You worked hard for this money, and your son is your legal heir. Any effort by your husband to spend all of your savings and fritter away any inheritance that you intended to leave to your son should be resisted at all costs.

You have worked too hard your entire life to compromise your plans for a comfortable retirement where you have money set aside for long-term medical care insurance, unforeseen emergencies and/or your son. If you jointly own your home, you can leave your half to your son in your will, and specify it can only be sold after your husband passes away.

If you own the home, you can give your husband a life estate. Your son would pay capital-gains tax on the value of your home when he sells it, and not when you bought it. You could also make your son the beneficiary on your life-insurance policy, and/or gift him a certain amount of money per year to see how he manages and spends that money.

Figure out what is fair to yourself first before moving on to what is fair to your husband and your son. It’s OK to put your needs first. I caution against your dipping into savings at a rate that is beyond your own risk tolerance.

Ultimately, you are entitled to leave all other separate property to your son when you die — and, along with a financial adviser, set up a trust with that in mind for you, your husband and your son. Not necessarily in that order.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.



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These money and investing stories, popular with MarketWatch readers over the past week, can give you a better understanding of bitcoin and other cyrptocurrency, and help you figure out if digital currency has a place in your portfolio alongside stocks, bonds and other traditional assets.

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