What We Learned From Bank Earnings

Key Data

• Expenses rose at 2 of the 3 banks around 8% for Q4 YOY, driven by higher labor costs. This is expected to carry into 2022.
• Loans grew at 2 of the 3 banks as corporate and securities banking picked up while consumer and commercial lending dropped.
• Bank profits should increase as interest rates rise making the selloff seem a bit absurd.

Big banks reported earnings this morning. Despite solid results, an unfortunate surprise lurked underneath.

Expensive Banking

Banks couldn’t escape the long reach of inflation.

Citigroup (C) and JP Morgan (JPM) saw shares trade lower even as earnings and revenues beat estimates.

How can that be you ask?

Cost controls failed in Q4 as non-interest expenses, those tied to operations, rose.

• Citigroup saw operating expenses jump 18% YOY in Q4 to $13.5 billion. A big chunk of this was tied to exit costs from its Asia business. Excluding that piece, they still jumped 8%.
• JP Morgan’s non-interest expenses jumped 11.5% YOY in Q4 to $17.89 billion.
• JP Morgan said they expect expenses to climb 8% to $77 billion in 2022.

However, Wells Fargo (WFC) managed to drop non-interest expenses by 10.8% to $13.198 billion.

Analysts questioned the difference between the banks. Management pointed to higher labor and wage costs to attract and retain top talent.

Wells stood as the outlier after having several rough years plagued by scandal.

Loan Growth

As expected, loans continue to grow at JP Morgan by 6% and Wells Fargo by 2.5%, mainly in the second half. However, this was driven primarily by securities and corporate lending. In fact, Wells saw a decline in Consumer and Commercial banking loans YOY in Q4.

Interestingly, Citigroup saw no loan growth.

All banks said they expect higher interest rates to improve their bottom lines by widening the spread between the interest they pay on deposits and the interest generated on loans.

Trading Revenues Drop

One of the reasons JP Morgan saw shares fall was the decline in trading revenue.

Analysts expected a 13.5% slide in fixed-income trading when the actual number came in closer to 16%.

The Bottom Line: The selloff in banking stocks seems a bit absurd. All three of these companies are still incredibly cheap and expect to increase profits in the coming months.

Of the tickers, we like Citigroup the best in terms of value. However, if you’re looking to play the sector more broadly, consider the XLF financials ETF or the regional banking KRE ETF.