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Bank Stock Earnings Roundup: The ‘Run on the Bank’ Bullet Has Been Dodged

The biggest banks weathered the storm well; regional banks face manageable earnings pressures.

Collage of bank sign photograph, money, dollar sign and graphs

After regional banking turmoil sent a tremor through the markets in March, investors were looking to bank stocks’ first-quarter earnings results for clues on just how bad the situation had gotten.

The answer: It looks like the worst-case scenarios are being avoided. But potential increased bank regulation could mean there’s more challenges ahead for some bank stocks.

Big banks such as JPMorgan Chase JPM and Bank of America BAC weathered the bank storm well, according to Morningstar Strategist Eric Compton. And for regional banks—including Fifth Third Bancorp FITB, Huntington Bancshares HBAN, and KeyCorp KEY—earnings are under pressure, but the results came in largely as expected.

“Given what we’re seeing from the results, many of the banks we cover look significantly undervalued, even factoring in the continued uncertainty,” Compton says.

The biggest banks saw some erosion of net interest income from higher funding costs, according to Compton, but he sees no real change to their outlook. In terms of smaller, regional banks, some have held up better than others when it comes to deposits on hand, but Compton says there are no signs of major deposit flight among the banks that are covered by Morningstar.

“Now that we’ve dodged the ‘run on the bank’ bullet, the market is more focused on potential changes to regulation,” Compton says. “The banks under my coverage should be able to handle those changes, if they do occur.”

Looking further ahead, if the Federal Reserve lowers interest rates as we expect next year, the potential impact is mixed among the banks we cover, according to Compton. If the Fed lowers rates, that will hurt net interest income (on average) for most of the banks, but at the same time, it would reverse some of the unrealized losses on the banks’ holdings.

“To the extent that the market is worried about changing regulatory capital ratios, reversing those losses is a good thing,” he says. “Lower interest rates can also mean higher growth in the future because discount rates would be lower.”

Major Bank Stock Performance

Data as of Source: Morningstar Direct.

Below, we’ve included first-quarter earnings summaries from Compton’s earnings reports, along with key stats on those bank stocks.

Bank of America

Wide-moat-rated Bank of America’s first-quarter earnings results brought no major surprises, although net interest income outlook remains murky. We still view the shares as being moderately undervalued.

The bank reported decent first-quarter results, showing that its deposit base and funding costs are tracking roughly as would have been expected, even before the Silicon Valley Bank implosion.

As we continue to sharpen our forecasts for the potential of upcoming interest-rate cuts, we expect we will decrease our fair value estimate for Bank of America by a low- to mid-single-digit percentage, looking to ensure that we are not overforecasting what NII might look like through the cycle (given that we are currently at what we view as a cyclical peak). This remains one of the more difficult aspects of forecasting future results for Bank of America.

Citigroup C

Undervalued Citi’s first-quarter earnings results showed revenue intact. The no-moat-rated bank was our top pick at the start of 2022 and remains one of the more undervalued banks under our coverage in 2023.

First-quarter results were even better than we expected. Adjusted earnings per share of $1.86 came in ahead of the FactSet consensus of $1.65 and just ahead of our own estimate of $1.76. The primary difference with our own estimate was a 4% beat on net interest income, or NII, and a 4% beat on expenses.

Going forward, Citigroup’s earnings are set to be quite messy for a while, and we think it is more important to ignore the noise and focus on core operations and the bank’s key targets. With no major disappointments, and with the bank seeming to handle the current turmoil just fine, we do not plan on making a material change to our fair value estimate of $75, barring any surprises on the upcoming earnings call.

We continue to view Citigroup as an undervalued stock with idiosyncratic catalysts that could help unlock value over the next several years.

JPMorgan Chase

The big takeaway from JPMorgan Chase’s first-quarter earnings results is that its earnings profile is not being negatively affected by the banking turmoil.

Earnings per share came in at $4.10 for the wide-moat-rated company, beating the FactSet consensus of $3.41 and our own estimate of $3.40. Earnings were strong all around, with NII of $20.7 billion trouncing our projection of $18.8 billion. Fees were also stronger than we anticipated, at $17.6 billion compared with our forecast of $16.3 billion, with trading results being exceptional.

JPMorgan was able to expand its deposit base in the first quarter, beat our expectations and consensus on net interest income and fees, and materially raise its full-year NII outlook. The bank reported a return on tangible equity of 23% in the first quarter, an exceptional result.

Results support our contention that the bank’s moat is as wide as ever. We view the results positively, and while we do not want to read too much into through-the-cycle profitability based on peak earnings, we would expect our current $146 fair value estimate to go up slightly based on these results.

Wells Fargo WFC

Wide-moat-rated Wells Fargo beat earnings expectations for the first quarter and kept its full-year guidance unchanged. We’ll wait for more details on the call, but with the outlook holding steady for now, we do not expect a material revision to our current $58 fair value estimate.

We view Wells as undervalued as the company reported a steady outlook for both expenses and net interest income. Wells’ 2024 expense outlook and regulatory progress are the most obvious factors that could lead to future changes in our view.

First-quarter earnings per share was $1.23, beating the FactSet consensus of $1.14 and our own estimate of $0.95. Net interest income of $13.3 billion and fees of $7.4 billion beat our own estimates of $12.7 billion and $6.6 billion, respectively. The bank’s net interest income outlook of 10% growth was unchanged.

To us, all this implies that either growth will come in above 10% or that the 2023 exit rate could be lower than previously anticipated, perhaps even as low as $11 billion. This will be something to watch as the year develops. In other words, some pressure on Wells’ net interest income is going to occur for the rest of the year. We previously had net interest income dropping close to this run rate by 2024, but it could come sooner.

Regional Bank Industry Performance

Data as of Source: Morningstar Direct, Morningstar Indexes.

Comerica CMA

Narrow-moat-rated Comerica reported first-quarter results that show earnings pressure is building, but we view the pressure as manageable. We believe the bank’s shares remain materially undervalued.

Comerica saw its deposit base decline 9% sequentially, worse than peers under our coverage, but the bank was already guiding for a greater deposit runoff than peers before March, so this isn’t a surprising result. The results were right in line with our updated “shock” projections published March 28, and the guidance implies that the runoff is essentially over.

As we update our projections once again and make sure we are being prudent with our through-the-cycle net interest margin estimate (assuming rates eventually fall from current levels), we may lower our $79 fair value estimate by a low- to mid-single-digit percentage.

Fifth Third Bancorp

Earnings for no-moat Fifth Third Bank showed a manageable decline in net interest income outlook. We believe shares remain undervalued.

If Fifth Third has to permanently hold more capital than we expect, we would likely only see a low-single-digit percentage impact on our fair value estimate. Therefore, while revenue are coming under some pressure right now, we think it is more than priced in the shares.

We do not expect a material change to our current $38 per share fair value estimate for the bank.

Huntington Bancshares

Narrow-moat-rated Huntington reported first-quarter results that show it has not been much affected by sector turmoil. We believe the shares remain moderately undervalued, although admittedly not as much as some peers.

We do not expect a material change to our $15 fair value estimate, and we do not expect our longer-term forecasts will be materially affected.

The results were better than we were expecting in our updated March 28 forecast, where we were looking for growth of only 1% for the year. Given that, Huntington’s deposit base and net interest income profile remain relatively intact.

Huntington saw its deposit base decrease only slightly in the first quarter, down 2%, which fits well within our existing forecast for a 3% decline for the year. The bank adjusted its full-year deposit growth outlook by only 1%. Funding costs are accelerating, which caused the net interest income outlook to fall to “up 6%-9%” from “up 8%-11%.” While this is not good, it represents a decrease of only $100 million in net interest income.

KeyCorp

While no-moat KeyCorp earnings are under pressure, we think the market is overly harsh and we see the bank’s shares as undervalued.

KeyCorp saw its deposit base increase slightly in the first quarter, which is good news compared with market worries about deposit outflows over the last month. The bank was able to maintain its full-year deposit growth outlook, although funding costs are accelerating, which caused the net interest income outlook to fall to “down 1%-3%” from “up 1%-4%.”

While this is not good, it is a better result than we were expecting in our updated March 28 forecast, where we were looking for a decline of 9%. We were also already projecting non-interest-bearing deposits to decline to a mid-20s percentage of total deposits and an accelerating deposit beta.

We wouldn’t read too much into a relatively small reserve build in the quarter and the one-time expense charge of $64 million. Excluding the expense charge, the stable expense outlook remains intact. We do not expect a material change to our $21 fair value estimate.

Truist Financial Corp TFC

Truist’s first-quarter earnings results showed funding costs accelerate, but the hit to profitability should be manageable.

The narrow-moat-rated bank’s revenue growth outlook showed nothing disastrous. Truist decreased its full-year revenue growth outlook to 5%-7% from 7%-9%. Given that this was driven almost entirely by lower net interest income, it implies to us a roughly $500 million drop in expected net interest income for 2023, or roughly a 3% decline from our previous outlook.

Truist has had a hard time getting away from the “one-time” extra expenses, and it will be adding a few more in 2023 and 2024 related to its insurance unit. We do not know how much yet, but this does seem to build on a theme we had noticed before: The bank has been unable to fully hit some of the original efficiency ratio targets from when BB&T and SunTrust merged. We had already adjusted our projections for this trend, but now it seems that these charges and higher FDIC charges will lead to an even higher expense base for the near term.

As we incorporate these results, we expect roughly a mid- to high-single-digit percentage decline in our $57 fair value estimate as we incorporate slightly lower revenue and slightly higher expenses. We still view the shares as undervalued.

U.S. Bancorp USB

U.S. Bancorp reported average earnings results. Earnings showed a slight drop in revenue outlook, but capital build should remain on track. We still view the shares as materially undervalued.

The bank’s full-year revenue guidance dropped by $500 million (a 2% drop), which was driven entirely by a decrease in the net interest income outlook. If anything, we think the drop in net interest income is likely a bit higher than the expected revenue drop, implying the fee outlook strengthened slightly. We think these results support our thesis that the largest banks will not face dramatic disruption to their deposit bases, and while some incremental pressure on revenue is likely, it will be manageable.

Aside from the drop in the revenue outlook, the main topic of the call concerned the bank’s transition to a Category II bank. We think there is a lot of confusion around this transition, and it is a complex topic. We would emphasize that the bank has a realistic path toward growing into the capital needs of a Category II bank by the fourth quarter of 2024, when the transition would likely occur. We will admit, we do not expect the bank to be increasing its balance sheet aggressively during this time and to be pursuing share buybacks or aggressive dividend increases. However, we think it’s very unlikely a capital raise will be needed.

As we adjust our forecasts for slightly lower revenue and the need to build capital in anticipation of becoming a Category II bank, we expect our fair value estimate of $58 will fall by a low-single-digit percentage.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Lauren Solberg

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Lauren Solberg is an editor for Morningstar. She covers market trends and economics.

Before joining Morningstar in 2020, Solberg helped build a music education startup. She holds a bachelor's degree in economics and Spanish from the University of Illinois at Urbana-Champaign.

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