Several leading investment banks have just reported first quarter earnings; here, Jason Clark, contributing editor to The Prudent Speculator looks at three banking firms considered "buys" for value investors.
With little surprise to most, Goldman Sachs Group (GS) posted Q1 bottom-line results that were below published estimates, as the investment banking and securities giant increased reserves for potential loan losses as the COVID-19 global shutdown continues on.
Net revenue for the period came in well above expectations at $8.74 billion, as trading, especially in the fixed income arena, benefited from the extreme volatility experienced in Q1. Adjusted EPS totaled $3.11, which was short of the expected $3.25, primarily on higher expenses and provisions.
Despite the challenging near-term backdrop, given strong activity levels, a healthy balance sheet and strategic repositioning, we think GS shares are quite attractive for the long-term.
While we don’t know how long the difficult environment will persist, we could see earnings rebounding faster than peers because of the company’s lower interest-rate exposure.
The build out of its traditional banking and investment-management businesses should serve shareholders well in the long run, as currently almost two-thirds of Goldman’s revenue comes from its investment banking and global markets trading business segments.
The ultimate goal of Goldman’s evolution is to change the trading and deal-making titan into a more well-rounded financial firm with more stable consumer and commercial businesses. That said, we won’t be surprised if it takes a few years for the efforts to begin to be truly rewarded by investors. Our Target Price for GS now stands at $276.
Shares of JPMorgan Chase (JPM) fell after the company’s release of its Q1 financial results. While analyst expectations did not consistently discount the impact of COVID-19, which makes sense given that nobody can know what the hit to business will be in the near- and intermediate-term, adjusted earnings per share of $0.78 came in below published estimates.
Of course, that was not a big surprise, as JPM built up credit reserves (adding $6.8 billion), saw widening funding spreads on derivatives and marked down the company’s bridge loan book.
Even with the uncertainty and brisk near-term operational headwinds, we continue to believe that JPM will not only survive the current crisis but will thrive on the other side, as was the case during the Great Financial Crisis.
The bank maintains a fortress balance sheet and a diverse the overall business model, while we think that there is plenty of management bench strength behind Mr. Dimon, who was only recently released from the hospital following emergency heart surgery.
While share buybacks were suspended through the end of Q2, the company continues to pay a quarterly dividend of $0.90, with the yield now residing at 3.8%. Our Target Price for JPM is $141.
Diversified financial firm Bank of America (BAC – $23.28) saw its shares drop more than 6% last week (even after spiking higher by more than 8% on Friday) after reporting Q1 financial results.
djusted EPS for the period was $0.37, which was 31% below expectations. The miss was driven by the bank’s decision to add $5 billion to credit reserves.
Given the current COVID-19 crisis and the unknowns around when the domestic and global economies might open back up and begin to heal, this was a smart move. For some context, BAC recorded less than $4 billion in credit provisions in all of 2019. While stock buybacks were wisely suspended, we liked that even the hard hit profits were more than enough to cover the quarterly dividend of $0.18.
We continue to be fans of BAC and see it as one of our core financial holdings. While there will continue to be near-term pressures, we see numerous long-term opportunities upon which BAC can capitalize, from its large deposit base and consumer lending franchise to its “thundering herd” of Merrill Lynch’s financial advisors and wealth managers.
In the midst of the COVID chaos, we think there is a business positive for BAC. Customers that might have been hesitant or resistant to use digital/mobile banking have been forced to reconsider and usage numbers would suggest a spike in utilization.
If comfort online is gained during this tragic time, it may give BAC the ability to have flexibility to cut branch count in more normal times, which could equate to massive cost savings. Our Target Price is now $39.
