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JPM, Citigroup, Wells Fargo kick off earnings season

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CFRA Research Director Ken Leon joined Yahoo Finance Live to break down the recent earnings of JPM, Citigroup and Wells Fargo and what this means as the banks kick off earnings season.

Video Transcript

SEANA SMITH: We want to get to another big story today that Jared mentioned earlier. And that is a big bank earnings that we got out this morning JPMorgan, Citi, Wells Fargo, all reporting before the bell. It was a bit of a different picture once you start to dig into some of these results. So JPMorgan beat on both the top and bottom lines. Citi and Wells Fargo, though, those two names are falling short on revenue expectations.

We want to bring in Ken Leon-- he's a research director at CFRA-- for a little bit more about this. And, Ken, let's just get to the stock price reaction. Because all three of the names under pressure today. JPMorgan off just around 1%. But we're seeing a lot of selling action in Wells Fargo and in Citi. What do you make of it? Do you think this drop is justified or is this a bit of an overreaction from Wall Street?

KEN LEON: Well, it's great to be here. And speaking about banks, we downgraded from buy to hold-- both JPMorgan and Citi-- and we reiterated our hold. These stocks have been part of a cyclical move since last September, all up over 50%. So the reality was what were the results and outlook from today, and what we saw was strong execution from JPMorgan. But the ability to sustain capital markets firing on all cylinders is tough to do every quarter. So we think JPMorgan's going to take a slight breather, but it's best in class.

Citigroup's got lots of problems. They have a new CEO coming on board soon. Their consumer business, particularly credit card, was weak-- North America, Asia, Latin America-- and lending was down. The ratio of loans to deposits is substantially deposits, but you know, the economy is still not strong. So both commercial and consumer loans are weaker.

Looking ahead for the full year of '21, things will get better. But, again, with the steep price move of each of these banks since last September, we think it's a time just to be on the sidelines and look for a different entry point. Banks will begin to have return of capital for dividends and buyback. That will be a good thing.

ADAM SHAPIRO: And we already saw that with JPMorgan that the $2.9 billion loan loss reserved release. Diamond actually said that it was a calculation that involves multiple multi-year hypothet-- I love that wealthy people can get away with these kinds of statements-- hypothetical probability adjusted scenarios which may or may not occur. Help us understand what he's telling everybody about what JPM thinks is going to happen over the next year or two.

KEN LEON: That's great. So front and center for the first three quarters last year was loan loss provision and reserve build. We made the call that we thought there would be a reverse of some of these reserves, which helps earnings. By the second quarter of this year, lo and behold, we saw it in the fourth quarter. So we were surprised to see that for Citi and Wells Fargo, as well.

And what that means is COVID-19's impact, particularly to building up loan loss reserves, is more of a rear mirror for investors. So looking ahead forward, you've got to think about the economy, building up loan activity, and perhaps getting a steepening yield curve so you get a better spread on your rates. But the story I think on loan loss provisions, other than it's a charge here a charge there for distressed industries, it's not a big deal anymore.

SEANA SMITH: Can the weakness in Wells Fargo-- this has been the story now for the last couple of years-- but they have another miss on revenue today. Higher costs were reflected in this morning's results. What does Wells-- what would you like to see Wells Fargo do to get a better handle on their business and really turn this bank around?

KEN LEON: You know, it's fascinating. So with that move from September until this week, Wells Fargo has moved from like the low 20s to 35. And we'd like to see results. Some of the analysts got very bullish on the stock, yet we have a CEO, Charlie Scharf, who's very, very prudent and careful each step by step with his $8 billion efficiency program. It's going to take many years. They have an asset freeze, loans were down, both consumer as well as commercial. And the upside for the stock is cost cutting, but it's going to take a lot of time. So we would not be moving into Wells Fargo here.

ADAM SHAPIRO: Ken, do you see the Federal Reserve, the regulators, actually loosening the leash, whether it be on Wells Fargo or the other banks as far as returning value to shareholders?

KEN LEON: It's a great question. And the milestone was December 18. It was phase 2-- the second stress test last year. And I said, "Banks, you can do dividends and you can do buybacks, but you can't raise your dividend in the first quarter." We'll probably see something maybe by February that they will be allowed to raise their dividend, and then you got the next cycle of stress tests in June.

We didn't hear from Jamie Dimon today or any of the other banks, but they have said in the past, "We are way overcapitalised." So if it's not necessarily the operations that really exceeds expectations, these would be stocks where you would expect an increase in terms of total return. And they have some yield, but it's not huge. But that might be another catalyst on the upside.

SEANA SMITH: Ken Leon, the CFRA's research director. Thanks for joining us.

KEN LEON: Thank you.