Earnings Roundup: How Did the Big Banks Fare?

By James Gard

Despite a record end to 2017 for U.S. stock markets as whole, profits at the major U.S. investment banks have taken a hit in the last quarter of the year. Unusually low volatility in equity markets and lower transactions in fixed-income or bond markets have harmed trading divisions' profits.

The fourth quarter of 2016, which the fourth quarter of 2017 is measured against, was an usually turbulent one for markets because of the U.S. presidential election. And tax changes have put a large hole in firms' quarterly profits. Nevertheless, in terms of earnings per share, the highest-profile Wall Street firms all beat analysts' forecasts for the quarter. Rising interest rates last year also boosted banks' income payments.

Banks have had to account for one-off charges in the period after the Trump administration's tax reforms--while big corporations will ultimately benefit from the drop in the company tax rate from 35% to 21%, they are having to absorb the costs of changes to how overseas earnings are taxed and how deferred taxes are treated.

In summary, Citigroup has "not yet returned to form" since the financial crisis, Sinegal says, and "has a long way to go before it out-earns its cost of capital.. Citigroup is rated as a 3-star stock by Morningstar analysts, and is currently trading a few dollars above our fair value estimate of $74 a share.

The bank took a one-off charge of $2.4 billion and reported profits of over $4 billion for the quarter, after the tax charge. The figure in the same quarter of last year was $6.7 billion.

JPMorgan is rated as a 2-star stock by Morningstar analysts, with a fair value estimate of $87 a share--the shares are currently trading at $112. "2017 results were consistent with our expectations, and we don't expect to significantly alter our $87 fair value estimate," says Sinegal. Looking ahead, analysts expect JPMorgan's scale and spending power will help give it an advantage over rivals.

Like all the firms in the sector, Bank of America expects the tax changes to boost profitability in the future.

"Most of the benefits will fall to the bottom line and be used to return to shareholders," chief executive Brian Moynihan said. This is likely to take the form of higher dividends or share buybacks.

Jim Sinegal, who covers Bank of America for Morningstar, raised the fair value estimate for the company's shares from $24 to $27 after the quarterly update, taking into account the tax changes and higher growth estimates. The company's shares are currently trading above $31.

Analysts did note a rise in loan losses in the quarter, and a fall in fixed-income revenues.

Its overall revenues were the standout figure in the earnings report, however, rising 5% to $7.37 billion, with the vast majority of that produced by the investment banking division.

Goldman Sachs is rated a 3-star stock by Morningstar analysts, and is trading around $9 above our fair value of $245 a share.

Morningstar analyst Michael Wong says in his most recent update: "Based on the fundamentals of Morgan Stanley's business, we see questions about its fixed-income business as largely a distraction; in our view, its wealth-management business is where value will be created." Indeed, this division generated revenues of $4.4 billion in the fourth quarter, against $4 billion the year before.

He goes on to say, in ascribing a “narrow moat” or slender competitive advantage to the company: “Its status as one of the largest financial institutions by both headcount and global reach means that the company has a competitive advantage derived from the personal networks of its employees and financial product distribution channels to garner transaction mandates.”