JPMorgan, Goldman profit updates may shape bank stock rally

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While Goldman Sachs Group Inc and JPMorgan Chase have turned in strong stock market performance over the past year, more gains could be on tap if the two megabanks provide any upside surprises in their upcoming profit reports.

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JPMorgan Chase JPM,
+0.82%,
Citigroup Inc. C,
+2.33%
and Wells Fargo & Company WFC,
+2.79%
Will report fourth quarter earnings on Friday. Bank of America Corp. Bac,
+2.12%
and Goldman Sachs GS,
+0.61%
Report earnings on January 18 and Morgan Stanley MS,
+0.57%
Provides its fourth quarter update on Jan. 19.

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Among the group, JPMorgan Chase is expected to earn $3 per share on revenue of $29.85 billion, according to analysts surveyed by FactSet. Wells Fargo is targeting net income per share of $1.10 and revenue of $18.67 billion. Citigroup expects earnings of $1.55 per share on revenue of $16.92 billion.

Bank of America is on tap to report earnings of 77 cents per share on revenue of $22.17 billion; Goldman Sachs is targeting earnings of $11.75 per share on revenue of $12 billion and Morgan Stanley’s earnings of $1.94 per share on revenue of $14.57 billion.

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Wall Street analysts believe rising interest rates will allow banks to increase their net interest margin on loans. With sentiment blowing the wind at their back, shares of bank stocks rose, as investors speculated that the continuation of the current economic recovery would benefit the biggest financial players in the space.

Bank stocks may struggle to repeat 2021 gains next year, but analysts see some grounds for optimism

Shares of Goldman Sachs are up about 47% over the past 12 months; JPMorgan has gained 31%; Wells Fargo is up about 75% and Morgan Stanley is up nearly 48% during the same time period, along with a 48% jump in Bank of America shares. Citigroup is up about 5.5% over the past year as the group’s laggards.

In contrast, the Dow Jones Industrial Average is about 17% of the DJIA,
+0.23%
and S&P 500 SPX,
-0.23%
There has been an increase of about 23% in the last 12 months.

Given the gains in bank stocks, investors looking for more reasons to plunge into the sector may have a reason for an increase in credit activity in the fourth quarter over the third quarter, as reported by the US Federal Reserve. .

Industrywide, commercial and industrial (C&I) loans grew 6.3% quarter-over-quarter through December 22, and total C&I-related loans also grew 5.5% quarter-over-quarter. According to Fed data, this is close to the highest quarterly growth in the same period.

JP Morgan analyst Vivek Juneja said in a note to clients on January 6, “Banks should start 2022 on a good note as there has been a sharp jump in commercial and industrial (C&I) credit growth at the end of 4Q. ” Slightly better net interest income and stronger investment banking, should be offset by further normalization of business and mortgage banking revenues and marked by some further expense creep due to inflation and higher revenues.

Juneja raised its price target on Wells Fargo & Co. WFC by $2.44% to $57 per share from $53.50 and Bank of America’s price target from $50 to $52.50. He lowered his price target for Citigroup from $80.50 to $76 per share.

Overall, analysts are taking a more bullish call on the big banks as they benefit from an expected jump in investment banking revenues and banker bonuses for 2021.

See Wall Street expects up to 40% increase in bonuses

UBS analyst Erica Najarian upgraded Bank of America to buy from neutral on December 10 and raised the bank’s price target from $37 per share to $64 per share.

UBS also raised its outlook on JPMorgan Chase JPM to buy from a 0.28% neutral and raised its price target from $149 per share to $210 per share. This advanced Wells Fargo & Co. to buy from neutral and raised the bank’s price target from $47 to $65 per share. Citigroup C, down 2.11% from $98, downgraded to neutral from buy, with a lower price target of $67 per share.

Najarian said she sees added value in Bank of America as it moves “to become the secular winner of the ensuing economic and rate cycle, just like how JPMorgan dominated the recovery of the global financial crisis by outperforming on profitability.” “

The US economy is likely to be the key driver for the bank’s performance in 2022, Kenneth Lyons, research rector at CFRA Research, said on Thursday, with Omicron version creating uncertainty in the near term.

He said Fed interest rate hikes expected in 2022 will lead to wider spreads and higher net interest margins and higher net interest income. He rates Goldman Sachs as a strong buy and has buy ratings on Wells Fargo, Morgan Stanley and Bank of America; With sell ratings on Citigroup and JPMorgan Chase.

“We believe that most diversified banks are undervalued,” Lyons said. “This overview is based on a review of earnings multiples and value-to-net tangible book value ratios relative to the S&P 500 Index in the context of historical valuation metrics.”

Banks are expected to help shed light on the pace of the US economic recovery and the Omicron variant effect, as well as consumer credit growth, which is well below pre-pandemic levels.

The risks of large bank stock performance include an unexpected geopolitical event that triggers a recession; Higher unemployment, and a more risk-adverse environment for investment banking and capital markets, Leon said.

He added that uncertainty remains over the outlook for consumer and commercial credit activity in 2022.

Looking at the broader banking sector, KBW Bank Index ETF BKX,
+1.60%

kbwb,
+1.59%
The S&P 500 is trading at about 62% of its price-to-earnings ratio. Over the past 10 years, the index has traded for about 70% of the S&P 500’s price-to-earnings ratio.

Overall, analysts are more bullish on earnings prospects for the coming quarter for both JPMorgan and Goldman Sachs, the two large bank constituents of the Dow Jones Industrial Average.

Back in September, analysts were expecting fourth-quarter earnings of $10.09 per share for Goldman Sachs, according to FactSet. The consensus estimate rose to $11.67 per share on December 31 and was raised to $11.75 per share on January 7. JPMorgan’s earnings forecast rose from $2.85 per share in September to $8 on January 7.

See Morgan Stanley raises ratings of banks ahead of expected hike in interest rates

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