GS Beats, JPM Misses: Winners and Laggards in Bank Earnings

SPEAKER_1 (0:00)

For more, let's bring in our panel. Joining us now, Dory Wiley, President and CEO of Commerce Street Holdings, and Stephen Biggar, Director of Financial Services Research over at Argus Research. Great to have you both with us. Dory, let's take a look at this here. I mean, we'll take a look at Goldman moving higher. They had a major beat, EPS 17.01 versus the roughly, I think, $13 that was expected. Revenue came in north of $18.5 billion.

But we got JPMorgan missing. Wells Fargo was mixed here. Are we seeing a meaningful divide between the big banks and what we got today, and those who benefit from trading and deal making versus those who are more exposed to traditional lending?

Dory Wiley (0:42)

Well, I think that's fair. The biggest miss or biggest differentiator in the performance of these is the funding source, right? So Wells Fargo doing the worst is most deposit dependent, whereas Goldman Sachs is the least, and it did the best. So everyone else falls in between. JPMorgan had some expense problems, some write-off problems, but, and then, and Citi was very, very, very, very impressive. I thought they did a beat across the board in many lines of business. In addition to, which no one's talked about, is their tangible book value grew while Citi's, excuse me, while JPMorgan's tangible book value was off a bit because of securities issues.

So I think they dealt with the rise in rates much better than JPMorgan did.

SPEAKER_1 (1:32)

And Stephen, you said coming into this that you did expect to see some softening from the second quarter because those numbers were so impressive. We had so many companies reporting record, record, record, record, a lot of that IPO activity, high trading numbers. How are you looking at the numbers we got this morning?

Stephen Biggar (1:51)

Yeah, well, certainly the, you know, the second quarter is turning out to be a high water mark for the large banks. And it was all capital markets related. You know, you had just records, as you said, for trading. You had investment banking, you know, that was M&A activity. You had a blockbuster SpaceX IPO in there that we just didn't have in the third quarter, which is traditionally a bit seasonal, seasonally weaker given the summer months, July and August included.

So some of these results, and of course, we did get a fair amount of the banks that were at the conferences. Bank conferences did mention that the results would be a little bit weaker. So it's not a huge surprise here. I think more of the commentary, though, that they talked about, the pipeline, the activity still being pretty strong. We're still expecting a major IPO enthropic in November, so that would help out the fourth quarter. So I think at large, the banks, the pipeline is in pretty good shape, and not that I'm overlooking these results. I don't think they were particularly weak. I think credit quality was still strong, loan growth very strong, particularly in commercial. That's had a nice acceleration here. Look, interest rates are always a double-edged sword for banks.

The higher they go up, the more you can see loan growth getting impacted on the negative side. They do tend to help short-term with net interest margins for a couple of quarters here. But banks are well-hedged and that's not really a problem. Interest rates go up, they go down, banks don't make money.

SPEAKER_1 (3:27)

Dory, I want to dive in to this JPMorgan report here with the rare miss on the top and the bottom. Their net interest income was pretty much in line and yet they raised their guidance in terms of its net interest income forecast. How are you reconciling the earnings miss with a more optimistic outlook?

Dory Wiley (3:46)

So if you notice they had a really big buy back in place and they really didn't enact it and that tells you something. Jamie's being cautious and he invested and said he was very clear. He said we're preparing for multiple scenarios. So you saw expenses increase by 12% versus revenues increased by 8%.

But the net interest margin is fine. In fact, the key tale there is he increased his expected net interest margin going forward. And I think you see that with most all of them except a little contraction there where at Wells Fargo. So the big tale is the big banks tend to have better control of their deposit cost funding sources. So going forward in regionals and community banks, I expect more of a net interest margin squeeze at least for the short term as they try to adjust their balance sheets to the rate change. They just don't have as much control over their deposit pricing to some of the money centers.