The largest U.S. banks reported their second-quarter earnings during the week and investors do not have much to complain about the banks as the KBW Bank Index (BKX) is up more than 65% during the past year (Exhibit 1) and YTD returns of over 25% in 2021 which is almost twice the gains of S&P 500 during the same period. The booming quarterly numbers for the banks emerged due to the escalating retail trading, increased deal-making M&A activities in SPACs, booming IPO market along with the massive stimulus unleashed by the government during the quarter. 

Exhibit 1: Returns of Bank Index (BKX) vs. S&P 500 over the year

Data as of July 18, 2021, | Source: Yahoofinance.com

Shares of Goldman Sachs surge as Q2 earnings beat market expectations

Investment bank Goldman Sachs (GS) reports its Q2 earnings during the week which beat Wall Street expectations attributed to strong performance in its Investment Banking (IB) and Asset Management division ahead of a robust IPO market and equity investments seen during the quarter.

Key Highlights

The company ranked no.1 bank globally for mergers and acquisitions, equity and equity-related offerings, common stock offerings, and IPOs year-to-date.  

The company’s investment banking segment posted one of its best revenue growths (36% year-on-year) attributed to the increased equity underwriting ahead of the booming IPO market and higher financial advisory revenues. 

Net revenues from the investment banking division added to $3.61 billion as against the consensus estimate of $3 billion.

The asset management division posted 144% growth year-on-year at $5.13 billion in Q2 2021 from $2.1 billion a year ago.

• Total Revenues: $15.39 billion (actuals) vs. $12.17 billion (Street expectations)
• Diluted EPS: $15.02 per share vs. $10.24 (expected)

Exhibit 2: Segment-wise revenue break up for Q2

Data as of July 14, 2021, |Source: Goldman Sachs Reports, Q2 Earnings

Revenues for the quarter grew 16% year-on-year to $15.39 billion

An increase in revenues was attributed to higher growth reported from the Investment Banking, Asset Management, and Consumer and Wealth Management divisions of the company during Q2. The Asset Management division which accounts for 33% of the company’s revenues posted record revenue of $5.13 billion more than doubled year-on-year primarily driven by significantly higher revenues from equity investments. 

However, the segment of the global market which includes Fixed Income and Equities trading saw net revenues of $4.90 billion which was down 32% year-on-year but both these sub-segments reported revenues above consensus estimates at $2.32 (fixed Income trading) and $2.58 (equities trading). Among the Geographical revenues: America accounted for 65% of the revenues, EMEA (Emerging Markets) accounted for 22% and Asia contributed to 13% of the Q2 revenues. 

Board approves 60% increase in quarterly dividends from Q3

The board also approves a 60% increase in the quarterly dividends to $2 per share from the next quarter starting September 2021, up from the previous $1.25 per share. The stock has rallied over 40% in 2021 as investors anticipated strong results. Book value per share increased by 5.6% during Q2 and 12.2% during the first half of 2021 to $264.90. 

Exhibit 3: Key Performance Metrics for Q2 and Year-to-date (YTD) 2021

Data as of July 14, 2021, |Source: Goldman Sachs Reports, Q2 Earnings

JPMorgan posts stronger than expected quarterly results after reporting record trading revenues

The U.S. Bank JPMorgan Chase (JPM) reported its second-quarter earnings during the week and both revenues and profits exceeded street expectations as the banking giant released its money which was set aside for the losses in loans that came in from the retail credit-card and mortgage reserves. The shares of the bank have gone up 24% this year before the quarterly results were announced. 

Key Highlights

Large reserve releases, solid investment banking (IB) performance and a modest rise in loan demand were the key growth drivers of the Company’s Q2 2021 results. Despite the modest rise in loan balance, the flattening of the yield curve and the low-interest-rate environment impacted the bank’s interest income. 

• Diluted EPS: $3.78 per share (actuals) vs. $3.21 (Analysts’ forecast)
• Net income was $11.9 billion (155% growth year-on-year) (Exhibit 1) up $7.3 billion driven by credit reserve release of $3.0 billion during the quarter but down 16% from the previous quarter.

Exhibit 4: JPMorgan’s Net Income for the quarter

• 

Data as of July 16, 2021, |Source: Data taken from JPMorgan Quarterly Earnings Report

Equity and Debt underwriting fees drove the Investment Banking (IB) segment growth

In terms of Net Income, the overall performance of the company’s business segments was good as all segments except the Corporate segment reported improved net income on a year-on-year basis.

Under the Investment banking division: The Equity and Debt underwriting fees rose 9% and 26% respectively. Increased stellar deal-making activities during the quarter saw a 52% increase in advisory fees and the Investment Banking segment grew 25% year-on-year

Among the other positives seen during the quarter: The Assets and Wealth Management average loan balances grew 21% year-on-year. The Credit Card sales grew 51% reflecting the rising consumer confidence and the economic outlook for the bank. 

Net Revenues on a reported basis was at $30.5 billion, down 8% year-on-year which was attributed to the fall in trading and mortgage banking fees and lower interest rates. However, the IB income was offsetting these losses and the company’s topline beats consensus estimates of $29.98 billion.

Takeaway

JP Morgan’s branch expansions, strategic buyouts and robust IB performance are likely to continue to support higher revenues for the bank going forward. The rise in loan balances is a major tailwind for the company as the economy reopens.

Fed Policy is positive for the banks

Businesses and consumers are likely to retain a careful approach with regards to their debt exposure as long as the Covid-19 battle continues but the banking sector will still benefit from wider net interest margins in case rising inflation numbers becomes more permanent and the Fed brings forward the next timeframes for interest rate hikes. Hence the current economic environment is likely to favour the banking sector in the coming quarters.

Banking sector valuations still look attractive at current levels

Valuations still look attractive for the big banks at current levels. The forward price to earnings ratios for the next year for the banks is still lower for JPMorgan (11.66x), Bank of America (13.8x), Citigroup (7.47x) and Wells Fargo (11.38x) which are all well below the price to earnings for the S&P 500 of 21.3x. Hence banking stocks are still relatively cheaper at current levels.