Double-Digit Earnings Growth Expected From Financials

This week, we use AAII’s A+ Stock Grades to give you insights into three major bank stocks benefiting from the release of billions in loan loss provisions and stock buybacks. For investors focused on a solid economic recovery, major bank stocks Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. may be the place to cash in.

Bank on It

The first-quarter earnings season is upon us and the results are expected to be strong. As of April 9, FactSet is projecting that S&P 500 index companies will report year-over-year earnings growth of 24.5% for the first quarter of 2021. This would mark the highest year-over-year earnings growth rate reported by the index since the third quarter of 2018.

Analysts expect double-digit earnings growth for all four quarters of 2021. The above-average growth rates for 2021 are due to a combination of higher earnings for the year and an easier comparison to weaker earnings in 2020 due to the negative impact of the coronavirus pandemic on numerous industries.

According to FactSet, the financials sector has recorded the second-largest increase in its expected earnings growth rate of all 11 sectors since the start of the first quarter, from 49.8% to 78.7%. More favorable economic conditions and rising interest rates likely contributed to the increase in earnings estimates for the sector as the yield on the 10-year Treasury note increased from 0.92% to 1.74% during the quarter.

Yields can rise for a few reasons, but the most important are expectations that growth and inflation will start to rise. The 10-year yield is a benchmark for consumer interest rates on mortgages, credit cards and student and auto loans.

Also helping to drive analysts’ projections is the expectation that banks will release some of the billions in loss provisions they set aside to prepare for loan losses in the aftermath of the pandemic. That, in turn will help boost banks’ earnings.

Earlier last year, the Federal Reserve suspended banks from buying back shares and placed restrictions on dividends. However, on December 18, 2020, the Fed said that, starting in the first quarter of 2021, banks would be allowed to restart share repurchases.

Following the completion of the current round of stress tests, the Federal Reserve Board announced in March 2021 that it will end its temporary restrictions on most banks paying dividends after June 30, 2021. Banks with capital levels above those required by the stress test will no longer have to face the curbs, while financial institutions with capital levels below required will remain subject to the limitations.

The big banks are now shifting their focus to increasing lending activity. There is optimism about loan growth and increased consumer spending as the economy continues to recover. In addition, the big banks provided positive guidance for the year, noting that net interest income is expected to improve in the second half of the year.

Grading Leading Bank Stocks With AAII’s A+ Stock Grades

When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

Using AAII’s A+ Stock Grades, the following table summarizes how attractive three major bank stocks — Bank of America, Citigroup and JPMorgan Chase — are based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three Major Bank Stocks

What the A+ Stock Grades Reveal

Bank of America is one of the largest U.S.-based financial holding companies, with a presence in consumer and commercial banking, investment banking, trading and wealth management.

Bank of America has a Value Grade of B, based on its score of 23, which is considered Value. The company’s Value Score ranking is consistent across several traditional valuation metrics, with a score of 34 for the price-earnings ratio, 29 for the price-to-book-value ratio and 26 for the price-to-free-cash-flow ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.

The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-sales ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio and shareholder yield.

With short-term interest rates still pinned to near-zero by the Fed, banks that borrow short and lend long hope that higher longer-term rates will improve margins in 2021. Net interest margins, a key measure of interest collected on loans minus interest paid on deposits, fell considerably over the course of 2020.

Among the large U.S. bank stocks, Bank of America is the most centered on the U.S. economy. CEO Brian Moynihan said last year that the bank’s third quarter would likely “be the bottom” for declines in its net interest income.

Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Bank of America’s Estimate Revisions Grade is B, Positive, which is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.

Bank of America has posted earnings surprises of 7.9% and 30.7% for its last two fiscal quarters, mainly due to positive contributions from its equity trading group.

In addition, over the last month, the consensus estimate for the fiscal year ending December 31, 2021, has risen 23.7%, while it has increased 25.6% in the previous three months. Over the last month, there have been 22 upward revisions to the fiscal-2021 estimate and two downward revisions.

Citigroup reported solid first-quarter earnings, beating FactSet consensus earnings per share of $2.60 with reported earnings of $3.62 per share. Citigroup’s higher consumer card focus remains a drag on revenue, with global consumer banking revenue down 4% from last quarter and down 15% year over year.

Meanwhile, Citigroup’s investment banking and trading had another positive quarter, helping institutional clients group product revenue grow 28% compared with last quarter and increase 5% year over year. Due to the stronger-than-expected market environment, management updated its revenue outlook for 2021 to down only mid-single digits, the high end of its previous guidance.

Citigroup will depend heavily on the return of the consumer, specifically consumer credit card spending and balances.

A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.

The quality grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

Citigroup has a Quality Grade of D, putting it near the bottom tier among all U.S.-listed stocks. The company ranks highly in terms of its buyback yield, ranking in the 91st percentile of all U.S.-listed stocks, but only average in terms of return on assets, ranking in the 54th percentile.

JPMorgan Chase & Co. is one of the largest global financial services companies, with nearly $3.5 trillion in assets and operations around the globe. The company is organized into four major segments: consumer and community banking, corporate and investment banking, commercial banking and asset and wealth management. The company has strong fixed-income and equity trading businesses.

JPMorgan Chase has a weak A+ Growth Grade of D. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow.

JPMorgan Chase has exhibited weak growth over the past year. Sales decreased 27% year over year for the quarter ending March 31, 2021, while operating cash dropped nearly 134%. However, the company managed to boost earnings by 47.5%.

The company has a Momentum Grade of C, based on its Momentum Score of 55. This means it ranks in the middle of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.

Morningstar senior equity analyst Eric Compton wrote in a note that wide-moat JPMorgan Chase reported excellent first-quarter earnings, blowing out the FactSet consensus estimate of $2.77 per share with reported earnings per share of $4.50. This equates to a return on tangible common equity of 29%. The biggest swing factor for the outperformance was the firm’s provisioning for credit losses.

As Compton had expected, JPMorgan released a sizable portion of reserves, totaling $5.2 billion. “While we had been more bullish than consensus on reserve releases, first-quarter results were even ahead of our own projections. We had expected just under $5 billion in releases for the full year, but the bank released more than $5 billion already during the first quarter of 2021,” said Compton.

Going forward, Compton had expected roughly $3.5 billion in reserve releases from JPMorgan in 2022, but given the accelerated timeline already playing out, some of these releases could be pushed into the current year.

JPMorgan CEO Jamie Dimon said, “With all of the stimulus spending, potential infrastructure spending, continued quantitative easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth.”


The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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