Survival of the fittest?
As the big banks kick off earnings season with their quarterly reports, they are shedding light on two sides of banking that are faring very differently during the pandemic, market analysts say.
Here's what five Wall Street professionals, including CNBC's Jim Cramer, said about the banks on Tuesday:
Aperture Investors Chairman and CEO Peter Kraus wondered if one of JPMorgan's main catalysts this quarter could last:
"We expected trading income to be pretty robust and it turned out to be the case. That's not surprising. We had an enormously fast-moving, very active market over the last three months, so, you would expect trading revenues to be good. They're probably a little bit better than what people expected. But then the question is: is that trading revenue really sustainable? And you're going to see that going into the future and that's [where] consumer income is actually more predictive of what we might actually see in the next three months to six months. … The banks are cheap. There's no doubt about that. But the question is what's the catalyst that's going to drive those earnings faster than the catalyst that drives the earnings in other investments?"
Marty Mosby, director of bank and equity strategies at Vining Sparks, said Wells Fargo was more of a long-term bet:
"Wells Fargo's a long-term ... turnaround story. We'll have to see how the management team can now go from reconstructing and really not having any expectation on what they do this year to what they build towards in earnings power as we go into next year. Cutting the dividend to where it is gives them a little bit of wiggle room, so, this provides a base [and] gets their yield down to about where the market is. But there's several other banks that have [gotten] ahead of the curve in a sense of their credit. The market is discounting them more because they think they're going to have credit from the last recession, but they've done a lot better and they've also restructured their balance sheets. So, those are the banks that we really want to look at now. Wells Fargo's a play as you go into, I think, 2021 or 2022."
Joe Terranova, chief market strategist at Virtus Investment Partners and a regular on CNBC's "Halftime Report," highlighted the differences between JPMorgan and Wells Fargo's performance:
"There's clearly a bifurcation between winners and losers. Just listen to the commentary from [Wells Fargo CEO] Charlie Scharf, who talks about being unsure about the length and severity of the economic downturn, and then read what [JPMorgan Chase CEO] Jamie Dimon says where he talks about the fortress balance sheet and being a port in the storm. So, on the money center banks, I think, clearly, JPMorgan is benefiting from trading revenue as a catalyst. I think that the technological investments that they have made over the prior years is allowing them, during this pandemic, to reach their customers in a more efficient [manner] than the other money center banks and I think that's the reason why investors should be owning JPMorgan."
Cramer, who hosts CNBC's "Mad Money," deciphered Wells Fargo's earnings commentary:
"Charlie Scharf is a great banker. He's got a very great pedigree. Visa. He was Bank of New York. But he comes out and basically says, 'Don't own my stock. You don't want to touch my stock.' And … Melissa [Lee] asked an analyst, 'Is it a contrarian play?' and I look at it and I say, 'Well, let me check with Charlie Scharf, the CEO.' Oops! No. Don't buy it. Now, if you want to come in and buy it, you don't really have Charlie's blessing. I always like it when the CEO likes their stock, but maybe this is just one of those rare occasions because he bought a ton of stock at [$]28 and it is no longer at 28. You can buy it less than he did, but this is not the Jamie Dimon called shot that we all remember. … Wells Fargo's a bank. It's like Monopoly. It's the community chest. And it's a very good bank, but they do not have those trading desks that are crushing it. JPMorgan, by the way, had a great trading desk experience."
David Konrad, managing director of equity research at D.A. Davidson, predicted the banks were unlikely to get an "all-clear sign" until 2021:
"I thought Jamie was pretty confident on the JPM call about the dividend, where it is and where the capital is. But, of course, a severe W-shaped economy puts that at risk. And so … getting through the next few quarters with better visibility of the dividend, and I think … looking at 1Q, 2Q of next year, kind of peaking credit costs, I think the market wants to see not only provisions coming way down, which, I think we'll see that, but I think it'll be tough for the banks to work with net charge-offs still ramping up. We want to see that delta come down as well. So, I think the big all-clear sign will be more mid next year."
Disclosure: Cramer's charitable trust owns shares of JPMorgan.