Payroll and tech spending wipe out rally in bank stocks

The outlook for payroll and tech spending weighed on big banks as they reported fourth-quarter earnings this month, as a rally in the sector in 2021 turned mixed this year despite positive loan growth .

While shares of Bank of America Corp. BAC,
+0.59%,
Wells Fargo & Co. WFC,
-0.72%,
Group C,
+0.66%
and Morgan Stanley MS,
+0.73%
have gained so far in 2022, Dow Goldman Sachs Group Inc. GS Component Stock,
+2.21%
and JPMorgan Chase Co. JPM,
+1.36%
remained in the red, down 7.3% and 6.2%, respectively, at Monday’s close.

For comparison, the S&P 500 SPX index,
+1.89%
is down 5.3% so far in 2022, the Dow Jones Industrial Average DJIA,
+1.17%
lost around 3.3% and the SPDR S&P Bank KBE exchange-traded fund,
+0.82%
gained 0.9%.

Goldman Sachs has lagged since CEO David Solomon warned that rising inflation could impact its customer base.

Of the group, Wells Fargo is the leader with a 12.1% gain so far in 2022, as the bank has scrambled to put some of its regulatory issues behind it and said it expects what its net interest income for 2022 rises 8% to nearly $39 billion, ahead of Wall Street expectations of about $37 billion.

See: Wells Fargo outperforms JPMorgan as big banks kick off fourth-quarter earnings season

Chris Marinac, director of research for Janney Montgomery Scott, said big banks have been more open this year about challenges around spending on people and technology after being more “coy” on these issues in the past.

“It’s a competitive environment for hiring people,” Marinac told MarketWatch. “Banks want to be competitive, whether it’s the queue at the branch counter or their most productive merchants or lenders on the sales team. They feel like if they’re not, it will lead to turnover and attrition.

This quarter, banks successfully communicated to Wall Street that they face “inflation and increased spending, but [they’ll] catch up as the year progresses,” said Marinac.

In 2021, banks moved from surviving the pandemic by stepping up their online products and back-office technology, but more spending on new technologies is coming in 2022 and 2023, the banks said.

“These comments challenged the spending forecasts – those were higher and surprising people,” Marinac said. “But you need to spend the money now to realize more revenue and cost savings later.”

Uncertainty surrounding interest rate hikes has also weighed on banks, which tend to profit from rising rates.

“What you have now is uncertainty about Fed balance sheet tightening and shrinking,” he said. “People have been on the sidelines again and rates have come down. Banks are caught in the middle. They would benefit from a steeper yield curve, but until that happens, it’s all semantics. We’re going to have this showdown until we have an official crunch.

See: Fed braces for more than four rate hikes this year, economists say

Read also : The Fed’s George calls for a sharp reduction in the size of the bank’s $8.9 trillion balance sheet

Among the big banks, Marinac said Bank of America (BAC) stood out with commercial loan growth of $55 billion in the fourth quarter, or about 6%, from the previous quarter.

“BAC is a big tanker and they are getting back to where they were before the pandemic – they had an impressive fourth quarter,” he said.

Jefferies analyst Ken Usdin said the big banks collectively had better loan growth of around 3% quarter-over-quarter, strong deposits, lower fees and higher costs.

“Revision trends are tricky given varying expectations for rate hikes,” Usdin said in a Jan. 25 research note. “Projections for 2022 include improved net interest income, increased spending, stable credit and fewer redemptions.”

Costs in 2022 will be impacted by inflation, although positive operating leverage is still possible, assuming the forward curve plays out, Usdin said.

On the positive side, credit quality remains “pristine” with median net write-offs of 15 basis points in the fourth quarter, he said.

Among the megabanks. Bank of America, Morgan Stanley and Wells Fargo attracted the most positive revisions to analyst earnings estimates in January, while JPMorgan lagged.

Since Dec. 31, Bank of America has set nine rating increases, three neutral or unchanged views and four rating cuts, according to FactSet data. Analysts currently expect first-quarter earnings of 78 cents a share, up a penny from their collective view on Dec. 31.

The bank reported fourth-quarter earnings per share that beat expectations on Jan. 19.

Wells Fargo has drawn 14 earnings increases over the past month and four earnings view cuts, out of 20 analysts polled by FactSet. Analysts currently expect the bank to earn 83 cents per share in the first quarter, up from a December 31 forecast of 78 cents per share.

JPMorgan Chase pulled rating cuts from 17 of 18 analysts surveyed and view hikes with no profit. Analysts currently expect first-quarter earnings of $2.79 per share for JPMorgan, down from their projection of $2.95 per share on Dec. 31.

Of the 18 analysts submitting earnings estimates on Goldman Sachs, nine have raised their estimates since the start of the year and eight have lowered them. On average, analysts expect Goldman to earn $10.59 per share in the first quarter, up from $10.66 per share as of December 31.

Of Morgan Stanley analysts’ earnings estimates, 10 were raised and six were lowered. Analysts currently expect Morgan Stanley to earn $1.97 per share in the first quarter, up from $1.94 per share on Dec. 31.

Citigroup drew earnings downgrades from 11 of the 18 analysts who submitted estimates, while five raised their estimates. On average, analysts expect Citi to post earnings of $2.05 per share in the first quarter, up from $2.14 per share as of December 31.

Read also : These 14 banking stocks are best positioned to benefit from rising interest rates

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