Investing Club: What to look for when Wells Fargo and Morgan Stanley report earnings Thursday

Published Wed, Apr 13 20224:30 PM EDTUpdated Wed, Apr 13 20224:32 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

JPMorgan (JPM) kicked off earnings season in earnest Wednesday morning, and shares of the biggest U.S. bank by assets are down more than 3% and hit a 52-week low. While the Club doesn't own JPMorgan, our two financials are reporting Thursday before the bell. Given the Street's sour reaction to JPMorgan, we wanted to let members know what we're expecting from Wells Fargo (WFC) and Morgan Stanley (MS). At the end of the story, we've also defined some banking terms such as "net interest income" and "efficiency ratio." You'll likely to hear them tossed around this earnings season, and these simple definitions explain why they matter. Bottom line The reasons why investors aren't in love with JPMorgan's quarter do not necessarily extend to Wells Fargo and Morgan Stanley. The big-picture economic issues — inflation, interest rates and Russia's invasion of Ukraine — are the same. But what they mean for each bank can vary. Wells Fargo We're expecting a solid print from Wells Fargo. One key difference between Wells Fargo and JPMorgan is geographic footprint: Wells Fargo is a domestic bank, while JPMorgan is more of a global operation. JPMorgan exceeded first-quarter revenue expectations, but had two specific drags on its profitability. CNBC's Hugh Son reports: JPMorgan said it took a $902 million charge for building credit reserves for anticipated loan losses, compared with a $5.2 billion release a year earlier. The bank also booked $524 million in losses driven by markdowns and widening spreads after Russian's invasion of its neighbor . Our takeaway is that Wells Fargo's earnings should not be weighed down by issues directly related to Russia. FactSet estimates 100% of Wells Fargo's revenue comes from the U.S., compared with nearly 75% for JPMorgan. Management commentary is area where we're expecting differences between WFC and JPM. JPMorgan CEO Jamie Dimon's remarks about the economy overall also may be impacting attitudes toward the stock. Dimon is known to be outspoken, and Wall Street listens to what he has to say on a range of issues. On Wednesday, the highly regarded CEO said that while he's optimistic in the short term, he sees "significant geopolitical and economic challenges" ahead. It's a reason why JPMorgan built up credit reserves. Wells Fargo CEO Charlie Scharf is generally more conservative with his commentary. We think Scharf is unlikely to venture into the territory Dimon did, which generally may help sentiment around Wells Fargo. JPMorgan's report gives us confidence about a key metric for Wells Fargo: net interest income. That is essentially what banks earn from their lending activities after subtracting what they pay customers on their deposits. JPMorgan's net interest income in the quarter rose 7% to $14 billion. Analysts expect Wells Fargo's net interest income to rise 5.6% to $9.3 billion, according to FactSet. Higher interest rates can lead to higher net interest income for banks, and we are in a rising rate environment. Wells Fargo is considered to be one of the biggest beneficiaries because of its large deposit base and sizable retail banking network. However, investor concern about a potential economic slowdown has been a headwind for the bank stocks in recent weeks, acting as a counterbalance to potential benefits from higher rates. Nevertheless, we remain believers in Wells Fargo, evidenced by our 1 rating on the stock. Morgan Stanley Earnings estimates for Morgan Stanley have been revised lower in recent weeks. Analysts expect the Wall Street bank to earn $1.71 per share, according to FactSet. That's about 13% lower than where projections stood on Feb. 28. A primary reason for the downward revisions is that investment banking activities such as initial public offerings and acquisitions slowed considerably in the first quarter. Last year, Morgan Stanley benefited from a turbocharged IPO pipeline and record M & A volumes . Like the rest of Wall Street, we expect Morgan Stanley to report softer fees in investment banking Thursday. JPMorgan's investment banking revenue missed estimates Wednesday. This is not surprising or revelatory, though. Investors have already factored it in. On the other hand, JPMorgan's report gives us confidence about Morgan Stanley's potential trading results. JPMorgan's fixed-income and equities trading revenue topped analysts' estimates by almost $1.3 billion combined. Morgan Stanley's first-quarter trading revenue is projected to be $4.46 billion, according to FactSet. In general, we think the bar for Morgan Stanley is pretty low going into this print — something we noted that last week when we bought another 75 shares of Morgan Stanley. We still feel that way after JPMorgan's results. Bank metrics to know Net Interest Margins (NIM) NIM is a profitability metric that measures the spread between what banks pay on deposits and what they earn on loans. Return on Equity (ROE) and Return on Tangible Equity (RoTE) These two profitability measures evaluate how effective a bank is at generating profits from its assets. Consistently stronger values tend to lead to higher multiples on stocks. Tangible Book Value Per Share (TBVPS) This is essentially what a bank's value would be if the firm had to shut down and liquidate all positions. In general, we believe that the big bank stock tend to trade in the general direction of book value, so if book value is increasing so should the stock price. Efficiency Ratio This metric is a measure of operating expenses as a percentage of revenues. It allows investors to see how lean and efficient the bank is running. We believe Wells Fargo has the great opportunity to improve its efficiency ratio. (Jim Cramer's Charitable Trust is long MS and WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A man walks past a Wells Fargo Bank branch on a rainy morning in Washington.

Gary Cameron | Reuters

JPMorgan (JPM) kicked off earnings season in earnest Wednesday morning, and shares of the biggest U.S. bank by assets are down more than 3% and hit a 52-week low.

While the Club doesn't own JPMorgan, our two financials are reporting Thursday before the bell.

Given the Street's sour reaction to JPMorgan, we wanted to let members know what we're expecting from Wells Fargo (WFC) and Morgan Stanley (MS).