Big 6 banks expect 3Q gains amid frothy M&A environment
20:30, 8 October 2021
American bank earnings kick off on Wednesday 13 October as the market focusses on merger and acquisition (M&A) volumes for short- and medium-term share increases and the possibility of US Federal Reserve rate hikes for long-term gains.
The Federal Reserve is expected to begin tapering its purchases of Treasuries and other mortgage assets before the end of the year, even after a lacklustre jobs report on Friday. Tapering is the first step toward rate hikes, which the Fed’s dot-plots suggest could come as early as next year.
Additionally, banks are expected to detail how they have cashed in on the surge of merger and acquisition deals completed this year, as well as how they can capture future deals. The total value of pending and completed deals announced in 2021 already topped $3.6trn (£2.64trn) through August, surpassing the full-year tally of $3.59trn in 2020, according to Refinitiv data.
“There has been a flurry of M&A activity, with some banks deploying excess capital via M&A while others sharply ramped up buybacks in 3Q,” JP Morgan research analysts wrote in a bank earnings preview report obtained by Capital.com. “With the Fed poised to begin tapering, the focus has shifted to rate hikes – all our banks benefit from higher rates, but sensitivities vary sharply.”
JP Morgan kicks off third-quarter earnings season on Wednesday 13 October with Bank of America, Citigroup, Morgan Stanley and Wells Fargo following on Thursday 14 October. Goldman Sachs is the last of the big six US banks to report on Friday 15 October.
JP Morgan
JP Morgan shares are up more than 35% year to date to a price of $170 per share.
Bank of America research analysts noted that JP Morgan is the second-best performing large-cap bank since the Federal Reserve’s September meeting, as shares rose 11% compared with a 1% gain for the S&P 500.
“The market appears willing to look past JPM’s premium valuation and add exposure to the stock given the optionality to higher interest rates, to rebounding credit card balances and the potential for continued momentum in the capital markets business,” BofA analysts wrote in a note obtained by Capital.com.
Bank of America
Shares in Bank of America have increased more than 47% year to date to a price of $44 per share.
JP Morgan gave bank of America an overweight recommendation reflecting the benefit from Bank of America’s strong retail franchise, greater sensitivity to long term rates, ability to return capital once allowed, and lower credit risk, the analysts said.
JP Morgan set a price target for BofA at $48 as analysts expect the bank’s earnings per share to increase to $3.22 up from earlier estimates of $3.17.
Citigroup
Shares in Citigroup are up more than 20% on the year to $72 per share, and JP Morgan analysts expect that could rise to a price target of $80.5 per share.
Still, the analysts hold a neutral view on the credit due in part to regulatory overhang from Fed and Office of the Comptroller of the Currency consent orders; challenges in delivering on its new CEO’s turnaround plan, which is still in development; and difficulties increasing profitability towards peers’ levels.
BofA analysts also noted that Citi continues to pursue the sale of its consumer businesses in 13 countries across the Asia Pacific region, which could cause some investors to take a wait-and-see approach ahead of management’s first-quarter 2022 strategic update.
Morgan Stanley
Morgan Stanley shares are up more than 46% year to date recently reaching new all-time highs of more than $100 per share.
Some of that outperformance caught up with the bank since the September Federal Reserve meeting as Morgan Stanley and Goldman Sachs have underperformed compared to the other big six banks.
Despite the high valuation, BofA analysts reiterated a buy recommendation due to Morgan Stanley’s potential to scale its retail trading platform E*Trade and continue to drive synergies tied to recent M&A.
Wells Fargo
Wells Fargo’s share price continued to climb through the quarter despite political volatility from Senator Elizabeth Warren calling on the Fed to revoke the bank’s status as financial holding company. Warren is also leading the charge for a change in leadership at the Federal Reserve once chair Jerome Powell’s term expires in February 2022.
“In our view management has done a good job setting expectations tied to the timeline for addressing regulatory concerns – we await more detail on path forward (and whether it could lead to an eventual lifting of the asset-cap),” BofA analysts wrote. “This especially given the heightened policy risk that has emerged over the last couple of months, including an expected change in the regulatory guard at the Fed.”
Shares in the bank are up 61% on the year to $48 per share and JP Morgan analysts set a price target of $53 per share.
Goldman Sachs
Shares in Goldman Sachs are up 48% on the year but have fallen 2.2% to a price of $392 per share since announcing its acquisition of point of sale lender GreenSky in September in an all-stock transaction valued as $2.24bn.
In August, Goldman also acquired Netherlands-based asset manager NN Investment Partners for €1.6bn.
“We are encouraged by the sense of urgency being shown by management, with the back-to-back deals in pursuit of its diversification goal,” BofA analysts wrote. “While the stock reaction has been negative, the deal makes strategic sense to us. In our view, better visibility around synergies with the rest of the consumer strategy and through cycle economics should cause investors to take a more constructive view.”
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