Bank Earnings Have Entered the Upside Down

Tyler Crowe (0:03)

It's Bizarro Bank Earnings Day. Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time fool contributors, Matt Frankel and Lou Whiteman. Guys, we're going to get into the challenge, I guess if it will, of investing in the robotic space and automation. We're going to hit the email, but we're going to start today because it's bank earnings weeks. We had three of the biggest banks already kick us off. We had JP Morgan, we had Goldman Sachs, Wells Fargo and Citibank all report earnings today. Guys, it was like that episode of Seinfeld where they had Bizarro, Jerry and the crew here because whatever was up, it was down. JP Morgan actually missed estimates, but its stock was up while everyone else beat earnings and saw their stocks go down. This is, of course, as we're recording, by the time this show drops. Perhaps that's changed a little bit, but it did show a little bit of the reaction of what we saw today. Obviously, anything that happens in any given moment, we're not going to look into it too much.

Looking across the whole space, I'm going to start with you, Lou. What is the one number from these big bank earnings that you saw so far that all investors should know about?

Lou Whiteman (1:21)

I know there's more important numbers and we can get into more of it, but that is the single most important number. That's JP Morgan's reported earnings per share. It is, as you say, a miss. Wall Street was expecting five ninety. This is significant to me because JP Morgan is the bellwether. Jamie Dimon is the oracle of Wall Street.

When they miss, it deserves attention. Look, I think the drivers are interesting too. Securities losses, slower investment banking.

What we're seeing, the story of this quarter, and we can get deeper into it is that banks with heavy trading models did well. The more diversified or rate sensitive franchises, I don't want to say did poorly, but they're showing signs of strain. I think that is my big takeaway based on that one number and everything else we got.

Tyler Crowe (2:09)

I want to go in a slightly different direction just for a second though, because we just came back from Foolfest, our annual live membership to get together. And our colleague, Emily Flippen, kind of put out a rather stark number. I think it was something like 85 percent of companies in the prior quarter and second quarter beat earnings estimates.

So is this maybe Wall Street upped the ante a little bit here, where it was like, you know, we can't have everybody beating that much. And so some of them might actually miss this quarter.

Lou Whiteman (2:37)

Maybe, maybe some. But look, I mean, again, JPMorgan is not a company, they're a company that tries to communicate pretty well. You take away the net securities losses and earnings per share was still below the estimate.

Look, it's just, it's not as easy as it was previously. That's the takeaway.

Tyler Crowe (2:57)

So Matt, same to you. If you, obviously there's a whole bunch of other companies we can go in their direction here. The one number you think matters the most.

Matt Frankel (3:05)

Well, one of the biggest reasons I like following bank earnings, it's not necessarily just for the banks themselves. It's because you can get a lot of read on the health of the consumer. It can have implications for literally every other sector of the market as we go through earnings season. One number that really stood out to me is card spending. Credit card spending at these major banks was up 10-13 percent. Even after adjusting for inflation, you're looking at 6-9 percent real increase in spending. Consumers aren't pulling back despite the uncertain economy. Consumer credit quality was strong.

Net charge-off rates were lower pretty much across the board.

All the bank CEOs said the consumer is healthy. They didn't say the same for business loads. That's where most of the reserve builds were. There were a few yellow flags throughout the industry. But generally speaking, consumers appear healthier and more than I would have thought.

Lou Whiteman (3:57)

The consumer is fascinating right now because you're right, Matt, that it looks fine. But then again, you hear all these stories about what is going on the credit card bills or what is going on with credit right now, things like utility bills, things like that. So I don't know how I read this through. The good news is that they're paying their bills and that is what we need. All we need is a critical mass able to continue with business as usual. But I worry that the card numbers from an individual company don't adequately speak to the strain that the consumer collectively is under right now. So that's still sort of a wait and see for me.