By Ben Levisohn
Earnings season has been a bust for bank stocks — but a boon for those businesses that can help themselves in the months ahead.
It has been a week since banks got earnings season rolling on Jan. 12, and the results have been unspectacular. Large charge-offs, related to replenishing the Federal Deposit Insurance Corp.’s coffers and other factors, dinged the final numbers, and few showed the kind of performance that would get investors excited, particularly after the strong end to the year. Since JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo got things started, the SPDR S&P Bank exchange-traded fund has dropped 2.6%.
The main thing that seems to set the winners apart from the losers is the potential for “self-help” — the Wall Street term for a struggling company’s ability to make changes by cutting costs and jettisoning underperforming businesses as it attempts to right the ship. That potential, as well as the missteps by stronger banks, should help keep stocks like Goldman Sachs Group and Citigroup leading, at least in the near term.
That Goldman would be preferable to Morgan Stanley seems, well, off. Morgan Stanley, through a series of shrewd acquisitions, had morphed from an investment bank into a wealth manager nonpareil, one that also happened to be an investment bank. Goldman Sachs, its rival, had stumbled in its quest to reach a retail audience, and even a matchup with Apple on a credit card — something that should have been a no-brainer — failed to move the needle. Goldman stock has returned 15.3% annualized over the past five years, while Morgan Stanley has gained 17.5%. Goldman trades at just 1.3 times tangible book versus Morgan’s 2.1 times.
After fourth-quarter earnings, it’s clear that Morgan Stanley needs a new story to tell. The bank reported a profit of 85 cents a share, missing estimates for $1.07 — and promptly fell 5%. While CEO Ted Pick, who was leading his first conference call since taking over from James Gorman, struck a note of optimism around long-term goals, investors were more focused on the short term, particularly margins at the wealth management business, which look to be stuck at the mid-20% level, well below long-term targets of 30%.
That was enough reason for KBW analyst David Konrad to downgrade the stock, cutting his rating to Market Perform from Outperform, and stating that Morgan Stanley “has limited near-term catalysts as Wealth Management is in a transition period.”
In other words, the investment bank that could do no wrong was suddenly being asked what it had done for us lately.
Goldman, on the other hand, is now seen as a turnaround story. After its disastrous foray into retail banking, the company has finally seen the error of its ways and is refocusing on what it does well — investment banking and trading. The company reported earnings of $5.49 a share, beating forecasts for $3.62, and finished Tuesday — a day when the SPDR S&P Bank ETF fell 2.6% — down just 1.2%. Goldman should benefit if mergers and acquisitions and other forms of deal making pick up, argues Oppenheimer analyst Chris Kotowski. “Overall we see GS shares as an excellent risk/reward setup for the potential of a sustained capital markets rebound,” he writes. What’s more, Goldman should also be able to boost margins by cutting costs and taking other measures, something the market gives it little credit for.
Citigroup, too, is another bank benefiting from self-help. It certainly needs it. When Bank of America, Citigroup, JPMorgan, and Wells Fargo reported earnings on Jan. 12, all took multibillion-dollar changes to help replenish the FDIC’s reserve fund, and all but Citigroup managed to turn a profit anyway.
Citi, though, was the stock that finished the day higher, up 0.9%. That makes sense. Though it reported a loss of $1.16 a share due to some large one-time charges — well below estimates for a profit of 11 cents — it also offered above-consensus revenue guidance for 2024. Combined with solid progress on reducing expenses, the stock could trade as high as $68, up 32% from Thursday’s $51.45, according to Seaport Global analyst Jim Mitchell, who calls the stock his top pick.
Such self-help is critical in a world where charge-offs for bad credit-card, automobile, and other debt are rising, net interest income is a work in progress, and a snapback in investment banking is still a wait-and-see. It’s even more so when bond yields are gyrating, interest rates may be stuck higher for longer, and more regulation is still coming down the pike.
Sometimes the ugliest stocks can win the beauty contest. This is one of those times.
Write to Ben Levisohn at Ben.Levisohn@barrons.com