Analysis: JPM WFC PNC FDX CAT MMM C GS

On Friday April 12th we will officially kickoff first quarter 2019 earnings season with JPMorgan (JPM) , Wells Fargo (WFC) and PNC Financial (PNC) reporting before the opening bell. In addition to getting a first look at business performance in the first quarter, banks are at the heart of U.S. economic activity and as a result are said to "set the tone" for earnings season.

As members know, bank earnings are crucial as they provide a unique perspective on both the domestic and global economic backdrop.

While there are a number of companies that can comment on what they are seeing in economic activity (think "bellwethers" like FedEx (FDX) , Caterpillar (CAT) or 3M (MMM) ), banks are uniquely positioned to discuss consumer and business sentiment across all industries simply because they are the money centers. They extend the lines of credit and aid in merger & acquisition negotiations. As a result, they have direct insight in demand for spending and borrowing, which speaks to the outlook their customers have on the economy. Remember, people don't borrow more or increase spending when you are fearful of an economic slowdown.

With that in mind, we believe that in addition to the headline numbers (revenue and earnings per share), the three metrics investors will want to keep an eye on are:

  • Return on Equity (ROE) and Return on Tangible Equity (RoTE) are two profitability measures that evaluate how effective the banks are at generating profits from their assets. Generally speaking, consistently strong values lead to higher multiples.
  • Net Interest Margins (NIM) as this is simply the spread between what banks pay on deposits and charge for loans and as a result, is directly tied to profitability.
  • Tangible Book Value Per Share (TBVPS), which is essentially the value of the bank if it were to shut down today and liquidate its positions. Remember, we like to look at what the P/TBVPS is, even before we look at P/E as this is highly representative of intrinsic, while providing no value whatsoever to recurring business or growth and can therefore be viewed as a strong basis for further valuation.
  • Loan Growth is another key metric we will be keeping an eye on. As noted above, responsible consumers and businesses do not increase borrowing when they are expecting an economic slowdown. As a result, this metric can be viewed as a key tell on business and consumer sentiment. That being said, increases in bad loans with credit risk would be a negative.
  • The Efficiency Ratio (aka overhead ratio) is another metric to watch as it measures operating expenses as a percentage of revenues and allows members to see how lean the bank is running, i.e., what those revenues cost to produce before factoring items such as tax.

When the banks report, one business area where we do not expect much improvement year-over-year is in trading revenues. However, the challenges and volatility in this division is quite understood by the markets at this point. With that in mind, let's take a look at what the Street is looking for when our bank names release their results.

JP Morgan

JP Morgan will report this Friday before the opening bell. You can read our commentary from the fourth quarter in our Alert here. Specific to this bank, we want to hear about the strength of the fortress balance sheet (which CEO Jamie Dimon highlighted in last week's letter to shareholders) and how the firm tracks to its 17% ROTCE target. Per FactSet, the consensus expectations are revenue of $28.438 billion, earnings per share of $2.35, TBVPS of $56.79, NIM of 2.56% and an efficiency ratio of 58.5%.

Citigroup

Citigroup (C) will report next Monday before the opening bell. You can read our commentary from the fourth quarter in our Alert here. Specific to this bank, we want to see expense control and growth in the Global Consumer Banking business. Per FactSet, the consensus expectations are revenue of $18.599 billion, earnings per share of $1.80, TBVPS of $65.03, NIM of 2.72% and an efficiency ratio of 57.4%.

Goldman Sachs

Goldman Sachs (GS) will report next Monday before the opening bell. You can read our commentary from the fourth quarter in our Alert here. Specific to this bank, we want to learn how the consumer business is doing with Marcus, see growth in fee-based or more-recurring revenues (was 61% in 2018), and get a more quantifiable number on the reserves dedicated to 1MDB. You can read our commentary from the previous quarter Per FactSet, the consensus expectations are revenue of $8.927 billion, earnings per share of $4.89, TBVPS of $198.74, NIM of 0.41% (not as important for an investment bank) and an efficiency ratio of 69.6%.

Lastly, we want to call out how the financials have failed to meaningfully contribute to the market's comeback this year. Due to their significance as a read on the U.S. economy, the ideal scenario we look for is a broader market rally that contains the bank. Although their year-to-date performances has been tepid due to inverted yield curve concerns and slowing economic growth, this might give the banks a decent setup into the print. An in-line to better than expected result along with the CEOs telling a good story about consumer spending, business expansion, loan activity, and net interest margins could be the recipe this inexpensive group needs to finally rally and then take up the broader market.