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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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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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