16 BARRON’S October 19, 2020
for just about any outcome don’t seem
to be enough. For investors in the big
banks, the glass seems to always come
up half empty.
The situation is largely out of the
banks’ control. They’re dependent on
interest income, but rates are near
zero and the Federal Reserve is likely
to keep them there for the next couple
of years. It has been painful: Bank of
America saw a 17% drop in net inter-
est income, surprising analysts and
casting doubt on future loan growth
even as management said it thinks
interest income bottomed in the third
quarter.Wells Fargo(WFC), in par-
ticular, faces a tougher path ahead as
its net interest income fell by 19.6%, a
result of operating under a $2 trillion
asset cap imposed after its fake-ac-
counts scandal.
The banks can try to make up for
that with loan growth, but even that’s
fraught with the economic outlook so
uncertain. Banks have set aside bil-
lions for bad loans in case economic
forecasts that are more dire than con-
sensus views—cash that could be re-
leased if the situation improves.
The risks, though, remain high.
JPMorgan CEO Jamie Dimon said his
bank is probably $10 billion over-re-
served. The eventual release of those
reserves could be a boon to sharehold-
ers, but if conditions dramatically
worsen, the bank could be $20 billion
under-reserved. It’s a bet investors
don’t seem willing to make.
It’s a shame, given that everything
else seems to be going right for JPMor-
gan these days. The bank, with its mix
of investment-banking and consumer-
banking services, saw its profits rise
4% compared to last year’s third quar-
ter, thanks to a 30% jump in trading
that offset a 9% drop in net interest
income. Unfortunately, it’s still a bank.
But relying on trading isn’t a win-
ning formula either, despite double-
digit growth at most of the big banks.
Trading had actually been a declining
business for banks in the years since
the financial crisis, and investors are
doubtful that recent boffo trading fig-
ures can last. For instance,Goldman
Sachs Group(GS) reported record
earnings thanks to 29% growth in its
trading business, which accounted for
42% of the bank’s revenue. But even
Goldman is in the midst of a multiyear
effort to diversify its revenue by mov-
ing into consumer banking. Appar-
ently, it wants to look more like JP-
Morgan.
One bank that has largely been
immune from scorn this year isMor-
gan Stanley(MS). Shares are roughly
flat in 2020, while the rest of the sec-
tor is off by 30%. It was also one of
the few banks to see its shares rise
after reporting its results—its stock
rose 1.3% this past Thursday.
Like Goldman, Morgan Stanley
benefited from a surge in trading ac-
tivity, but it’s wealth and investment
management units, which grew by 7%
in the third quarter, have been provid-
ing the kind of stable returns inves-
tors want to see. “The market is look-
ing to reward [banks with] longer
lasting, predictable revenue streams,”
David Konrad, managing director at
D.A. Davidson, tellsBarron’s.
And Morgan Stanley is continuing
to move in that direction. It recently
completed the acquisition of E*Trade,
and is buying money managerEaton
Vance(EV), using cash that the Fed-
eral Reserve has said it can’t return to
shareholders.
“We have to do something with this
capital,” Morgan Stanley Chairman
and CEO James Gorman told analysts.
“Our shareholders, rightfully, who
own the company, are entitled to gen-
erate a decent return on the capital
investment in the company.”
And Morgan Stanley may have
found the formula to give it to them.B
WhyIt’sTough
ToBeaBank
TheseDays
JPMorgan Chase, Bank of America, and Citigroup
all reported strong quarters. And their stocks fell.
Margin
Of Safety
JPMorgan
Chase’s Jamie
Dimon believes
the bank is
over-reserved
for bad loans.
If he’s right, that
cash could
end up with
shareholders.
$10 Billion
The amount of
cash Dimon thinks
he could have after
paying off bad
loans.
E
arnings season has come
and gone for America’s
biggest banks, and if it has
taught us anything, it’s this:
If you’re a bank, it’s best not
to look like one.
Third-quarter earnings
from the big banks—a cohort that
includesJPMorgan Chase(ticker:
JPM),Citigroup(C), andBank of
America(BAC)—largely surprised to
the upside as robust trading activity
helped offset lower net-income mar-
gins, and profits weren’t crimped by
having to add billions to reserves to
protect against bad loans.
You wouldn’t know it by looking at
their stocks, however. JPMorgan
shares fell by more than 2% after re-
porting, despite beating earnings per
share expectations by 31%; Citigroup
dropped 4.8% despite a 54% beat; and
Bank of America lost more than 5%
after topping forecasts by 4%. Even
balance sheets that have been tested
By CARLETON ENGLISH
For investors in big banks, the glass seems
to be perpetually half empty.
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