Big Four Banks - In Good Shape.

Macro Perspectives

Second quarter earnings season is just getting underway.

We  heard from three of the big banks last week - JP Morgan, the biggest bank in the U.S., "missed."

That was the big news on Thursday, but don't let the headlines fool you - they had growth in almost every category. The exceptions: investment banking, and assets under management (due to the decline in the stock market).

The earnings miss was a management decision . . . they chose to take charge offs and move almost half a billion dollars to "loan loss reserves."

That's the corporate America playbook for a down stock market. Put all of the bad news you can muster on the table, and you're set up for positive surprises in the quarters ahead.

If we add the allocation to loan-losses, back to earnings, JP Morgan would have beat estimates by 2 cents. Meanwhile, they grew year-over-year revenue by $200 million.

This, rather than the headlines, is more in line with the way Jamie Dimon (CEO of JP Morgan) described the health of the economy. He said, "the U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy."

Now, add to this, we heard from Citibank and Wells Fargo on Friday.

Citi beat on earnings and revenues. They, too, took a big write off for bad debt, and set aside $375 million for (additional) loan losses. They still beat . . . 

Wells Fargo missed. This is the "put all the bad news on the table" poster child. They took big write downs on private equity and venture capital investments. Meanwhile net interest income jumped 16% . . .

Keep in mind, these three banks still have a combined $10 billion more in "loan loss reserves" than they did prior to the pandemic. This is a war chest of capital that was set aside early in the pandemic, that will be moved to the bottom line (i.e. turned into earnings) at their discretion.

Bottom line: The big four banks are in good shape, and are cheap, with forward P/Es under 10.