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Big U.S. Banks Crush Q2 Earnings, Is Loan Growth On The Cards?

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·5 min read
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The biggest U.S. banks reported stellar Q2 performances. While 2021 is turning out to be a weak revenue year, continued improvement in the broader economic environment, strong credit quality, and net reserve releases are significantly boosting the profitability of the top American banks. Furthermore, banks continue to return excess capital to shareholders through dividends and share buybacks.

Though profitability improved in Q2, the lower interest rate environment remained a drag, putting pressure on net interest income. On the balance sheet front, trends continue to improve, with deposits driving modest growth. However, loan growth remains a challenge.

With steady improvements in the macro environment and rising consumer confidence, the obvious question is will these banks report loan growth this year? Before jumping to the loan growth outlook, let’s take a quick look at the quarterly performance of these big banks.

Citigroup (C)

Citigroup delivered better-than-expected Q2 results, reflecting benefits from the release of allowances for credit losses and an improving operating environment. Earnings of $2.85 a share handily surpassed the consensus estimate of $1.96 per share. While end-of-period loans slipped 1%, deposits increased by 6%.

Following the Q2 beat, Oppenheimer analyst Chris Kotowski assigned a Buy rating with a price target of $116 on the Citigroup stock. This reflects 12-month upside potential of 69.5% from current levels. Kotowski sees Citigroup as the “most compelling opportunity among large cap banks.” He added, “Citi remains one of the cheapest banks in our universe of coverage, at 0.88x tangible book value.”

Overall, 8 Wall Street analysts have weighed in on Citigroup shares in the past three months, giving the stock 7 Buys and 1 Hold for a Strong Buy consensus rating. The average Citigroup price target of $89.44 implies approximately 30.7% upside potential to current levels.

JPMorgan Chase & Co. (JPM)

JPMorgan Chase’s Q2 EPS of $3.78 came in well ahead of the Street’s estimate of $3.20, thanks to the $3 billion of credit reserve releases. While average loans remained roughly flat, deposits jumped 23%. Following the Q2 results, RBC Capital analyst Gerard Cassidy assigned a Buy rating with a price target of $160 (2.9% upside potential).

In a note to investors, Cassidy said, JPMorgan Chase’s premium valuation “is warranted by the company’s consistent fundamental performance, strong capital position, and clean asset quality. Our price target and implied return support an Outperform rating.”

Consensus among analysts is a Moderate Buy based on 8 Buys, 4 Holds, and 1 Sell. The average JPMorgan Chase price target of $174.55 implies 12.3% upside potential. Furthermore, JPMorgan Chase has an ‘Outperform’ Smart Score of 8 out of 10.

Wells Fargo (WFC)

Wells Fargo’s Q2 earnings of $1.38 per share compared favorably to the consensus estimate of $0.97. Its credit quality improved, while a significant reserve release supported the bottom line. Its loans declined 12% year-over-year, while deposits increased by 4%.

Oppenheimer analyst Chris Kotowski said, “We remain unconvinced that there is much near-term to get excited about and that the company is instead as management has repeatedly said on many occasions “on a multi-year journey” to rebuild its earnings power as well as trust with customers and regulators.” Kotowski has a Hold rating on Wells Fargo stock.

Overall, 13 Wall Street analysts have weighed in on Wells Fargo shares in the past three months, giving the stock 7 Buys and 6 Holds for a Moderate Buy consensus rating. The average Wells Fargo price target of $49.82 implies 10.7% upside potential from current levels. Wells Fargo stock has an ‘Outperform’ Smart Score of 9 out of 10.

Bank of America (BAC)

Bank of America reported earnings of $1.03 per share, which fared better than the Street’s estimate of $0.77 a share, reflecting a reserve release of $2.2 billion. However, weak revenues disappointed. The bank’s deposits grew 14%, while average loan and lease balances declined 11% year-over-year.

Oppenheimer analyst Chris Kotowski assigned a Buy rating on Bank of America stock with a price target of $49, implying 26.2% upside potential. In a note to investors, Kotowski said that Bank of America stock trades “at a ~20% discount to the historical average large capitalization regional bank, even though ~80% of its revenue base is relatively stable and predictable.” He added, “We think that our 2022 estimate is conservative as it assumes no help from rates, only modest loan growth, and a return to a “normalized” 2019 NCO rate.”

Overall, Bank of America stock has a Moderate Buy consensus rating based on 8 Buys and 4 Holds. The average Bank of America price target of $44.29 implies 14.1% upside potential from current levels.

Goldman Sachs (GS)

Goldman Sachs delivered a solid Q2 beat, reflecting continued momentum in financial advisory and corporate lending, underwriting, and higher net interest income. Its EPS of $15.02 came well ahead of the consensus estimate of $10.23.

Following the Q2 results announcement, Credit Suisse analyst Susan Roth Katzke maintained a Buy rating on Goldman Sachs stock. The five-star analyst raised the price target to $425 (13.8% upside potential) from $420, citing improving operating leverage.

Overall, 15 Wall Street analysts have weighed in on Goldman Sachs shares in the past three months, giving the stock 12 Buys and 3 Holds for a Strong Buy consensus rating. The average Goldman Sachs price target of $421.80 implies 13% upside potential.

The Takeaway

While steady economic growth and lower provisions could continue to support the earnings of the banks, revenues could remain weak, reflecting lower interest rates. However, banks remain optimistic and expect an uptick in loan growth as the year progresses.

JPMorgan Chase’s CFO, Jeremy Barnum, said, “we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next.”

Meanwhile, Citigroup CFO Mark Mason stated, “we expect continued stabilization in the back half and we should start to see some loan growth by the end of the year.”

Overall, top US banks remain well-positioned to benefit from the broader economic recovery and improved credit quality. Besides, an uptick in the loan growth rate could significantly boost their financials.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.