Following strong equity market returns in 2019, fourth quarter earnings season presents investors the opportunity to assess if profits and guidance justify valuations. The US financial sector which classifies itself amongst the three largest sectors in the US economy, was the third best performing sector in the US during 2019 – returning 33 per cent on a yearly basis. With US top banks among the first companies to report fourth quarter earnings results, the US financial sector became this week’s earnings focus.
Despite that analysts have lowered expectations for fourth quarter earnings in the US, Factset reports that the financial sector is among the five sectors expected to report earnings growth for the final quarter of 2019. As US top banks issued earnings results over the past days, one thing became evident: the strength of the US consumer was reflected in bank’s bottom line numbers.
JP Morgan Chase posted a record-breaking year, with its results overshadowing rival banks. The largest US bank reported a net income figure of $36 billion, marking its strongest annual profitable year since the financial crisis. The bank managed to beat both revenue and earnings expectations on the back of stronger results across trading, investment and retail banking units.
Citigroup also delivered stronger than expected revenue and earnings growth, over sustained improvement in its consumer operations and better than expected results in trading and investment banking. Meanwhile, Bank of America’s strong loan growth and better than expected lending margins led to higher earnings per share than estimated.
Meanwhile, Goldman Sachs reported revenue growth of 23 per cent for the final quarter but reported a miss on its bottom line earnings when considering the bank’s litigation costs. The bank reported a sizeable litigation charge which led to a 26 per cent decline in net income.
On the other hand, similar to earnings results in the previous quarter, investors were disappointed with Wells Fargo earnings announcements which missed analysts’ profit expectations. The bank reported a 53 per cent drop in its bottom line as it continues to suffer from its 2016 fake accounts scandal.
Fixed income trading performance was a common tailwind across the top performing banks, following a challenging 2018 for financial markets. Leading the whole financial sector, JP Morgan Chase reported an 86 per cent surge in fixed-income trading revenues year-on-year. Citigroup also benefitted from fixed income trading, with a significant increase of 49 per cent when compared to the previous year. The strong trading results helped to offset the negative impact of compressed margins.
Strong performance across the final quarter was also attributed to the strength of the US consumer, as banks reported strong revenue growth in their credit-card operations. Chief Executive Jamie Dimon of JP Morgan highlights how an increase in wage growth combined with a low interest rate expense environment, helped boost consumer spending. Banks recorded a rise in credit card spending during the fourth quarter, aided by a strong holiday shopping season.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.