For banks, third-quarter-earnings season is just over a week away, but the results may be anything but uniform.
Oct. 14 will see a slew of big banks report, with Citigroup (ticker: C), JPMorgan Chase (JPM), Morgan Stanley (MS), PNC Financial (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC) all up to bat. They'll be followed the next week by even more financials, including Bank of America (BAC) and Goldman Sachs Group (GS).
While their results may come in close succession, their stock performances may diverge.
Banks are grabbing headlines again, albeit in the worst way, amid mounting concerns about Swiss giant Credit Suisse $(CS)$. Barron's argued that Credit Suisse was unlikely to go the way of Lehman Brothers, and that as a whole U.S. banks had less to worry about in terms of systematic contagion from the firm's woes.
Nonetheless, it would be glib to therefore conclude they don't face their own gauntlet this earnings season.
Credit Suisse's problems may be its own, but a recession in Europe, now seeming all but inevitable, would have reverberations far beyond the Continent. Commentators are still debating whether or not the U.S. can sidestep the same fate, but even if it does, fears of a recession typically suppress bank stocks -- and plenty of others.
Indeed higher interest rates, which many fear could tip the economic scales, cut both ways for banks. Initial public offerings are down, as are the value of mergers, leading to a return of layoffs.
Still, that's not to say investors should avoid the sector entirely, particularly given low valuations and what may be overly pessimistic profit outlooks.
Barron's previously argued that J.P. Morgan was oversold, and Citigroup's Keith Horowitz argues much the same Tuesday. He reiterated a Buy rating and $135 price target on J.P. Morgan stock while opening a positive catalyst watch on the shares ahead of earnings, as he believes a "earnings beat on the top line will lead to upward revisions on full year guidance."
He sees banks in general as attractively priced for longer-term investors, given low valuations and the tendency of the market to overestimate the pressure on banks during downturns -- particularly as credit risk comes at a time when banks will see some benefit from a nonzero rate environment. While regulatory risk remains a worry, given changeable capital requirements for banks, he argues that's not an insurmountable obstacle.
Horowitz upgraded Bank of New York Mellon $(BK)$ stock to Buy from Neutral, citing its limited credit risk, but also argues investors could do well with pair trades this earnings season. He notes that Bank of New York Mellon trades at the highest implied cost of equity capital (COE) in his coverage universe, while Northern Trust $(NTRS)$ trades at the lowest; the latter also deserves some caution, he writes, given greater risk for downward revisions given the market-sensitive nature of some of its revenue.
In another pair trade, he warns that Truist Financial (TFC) looks vulnerable to negative earnings revisions, due to net interest income (NII) and expenses, along with higher credit risk, while Wells Fargo looks better positioned.
Goldman Sachs' Richard Ramsden agrees, as he upgraded Wells Fargo stock to Buy from Neutral on Monday, bumping his price target up by $2 to $48. He, too, believes that the company has less credit risk in a potential recession, given less exposure to credit cards, and that its loan growth can fuel further NII. In addition, he highlights its "best-in-class revenue upside" that could drive an "underappreciated earnings growth story."
By contrast, he downgraded Citigroup stock to Neutral from Buy, while lowering his target to $47 from $54. Ramsden's base case isn't for a recession, but should it come to that, Citi could have to limit its balance sheet growth to fund more reserves, while it also skews more heavily toward credit cards. Even absent that, he argues that Citi, despite meaningful progress, will still have to build more capital to achieve its higher common equity tier 1 capital (CET1) ratio, leaving less room for earnings upside.
It's also worth noting that Wells Fargo has seen relatively minimal downward earnings revisions in recent months, according to FactSet. The stock has had more positive momentum in the past 90 days, holding up better than its financial peers and the broader market.