US Banks Previews Round 1: Which bank is a well-grounded investment

The theme for banks this earnings season is balancing increased net interest income with increased provisions ahead of expected economic turmoil.
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Getting ready for the storm

Net Interest Margin is the difference in how much banks have to pay to borrow money and how much they can charge to loan out money. This constitutes the bulk of revenue for most banks. With higher interest rates, that difference widens, meaning that typically higher interest rate
environments lead to higher profits. But, with an expected recession next year, US banks are provisioning over $4.0B in the last quarter, which would likely significantly reduce their profits.

JPMorgan prepared for bad loans

One of the more outspoken people about a coming recession is JPMorgan's CEO, Jamie Diamond, who reiterated his warning just days before the bank's earnings release. In the first half of the year, the bank put aside $2.56B for potential bad loans and likely will add another $1.0B to that amount this quarter. Earnings are expected at $2.91 per share, well below the prior year. Revenues are expedited to be higher both year-over-year and sequentially at $32.1B.

Citigroup in bad shape after dividend suspension

The other of the two banks that underperformed during the latest Fed stress test, Citigroup, suspended dividends after it had to raise its capital buffer. The company has averaged $860M in provisions over the last quarter, less than what it put aside ahead of the covid pandemic. The
focus will likely be on the capital build and how much it adds to the $2.2B set aside. Citigroup is expected to report earnings of $1.44 on total revenue of $18.3B.

Wells Fargo stands firm, and it may show

As the premier retail banker in the US, it is likely to be in a tougher situation if the economy were to worsen. On the other hand, it is one of the more prominent beneficiaries of Americans taking on a record amount of debt. But that will imply an increased need for provisions, though having an NPL ratio below JPMorgan, it might be able to generate a little more profit than its rival. Earnings are forecast to rise sequentially to $1.09 on improved revenue of $18.8B.

Performance comparison

All three banks are down year-on-year with 1-month declines lower than 3-month. This implies that most of the losses are due to short-term losses. JPM and WFC are down 4.06% and 4.57%, with Citi 7.48% QoQ, but 30-day losses show declines of 14.24%, 11.02% and 19.78% -
respectively. The same trend can be observed for the 1-year period: Well Fargo is least down, Citi. Surprisingly, the 200-day average over the past month is -4.48%.

Although Citi is performing terribly, it's also further from the 200-average, making a mean reversion more likely. However, the downside trend acceleration of Citi suggests that the mean might be more likely to follow price rather than the other way around. At least a sideways consolidation could shift the probabilities, but chances are slim below its October low. With that being said, and given the performance characteristics of all three stocks, WFC might be better positioned for a short-term mean-reversion than JPM and Citi. It also trades above the October
low.

Key takeaways

Banks are expected to see a reduction in their profits despite higher interest rates due to a looming recession. JPM expects better revenues but keeps adding to the bulk of money for bad loans. Citi is on an identical path to JPM, but with dividends suspended, the stock is worst hit as
uncertainty surrounding the capital buffer added to the poor performance. On the other hand, WFC might be in a better position due to NPL and its retail footprint. However, it is likely to be in a tougher situation if the economy were to worsen.