Some of them are reported as "beating expectations", others aren’t, because of the factors we know about as likely to cause lower earnings. Those are rising interest rates, trading losses (mainly in bonds), less Merger and Acquisition activity (M&A) and other corporate activities that they are typically involved in: SPACs, NFTs, ETFs and, if not Twitter, then FTX and other crypto fall out.
Aren’t acronyms wonderful? Most people buying an ETF (Exchange Traded Fund) have no idea what is in it.
What you do with a fractional ownership of a painting or baseball card (Non-Fungible Token) other than bragging rights, the investors usually do not know.
But away from the craziness of those and meme stocks in which prices are driven through momentum-chasing groups linked through social media, we need to look at the hard numbers at the end of the day: the stated earnings of the banks — as it is those that determine a "fair price" for the shares.
The analysis is relatively straightforward, given that in the US companies are obliged to provide quarterly earnings quite soon after the quarter-end.
The reports compare the earnings with the previous quarter and the same quarter a year ago. Also, the trailing twelve-month (TTM) earnings — for the past four quarters — are shown.
All of this and the relevant percentage changes can easily disappear in the flurry of other earnings being reported and the fact that they are on different days.
Both Goldman Sachs and Morgan Stanley reported on the same day, so there were some interesting comparisons made.
In a previous article, the suggestion was that it was not the ‘better-than expected’ (or worse, as the case may be) that would be important but the actual levels especially the TTM as those are used for Price/Earnings (P/E) multiples that many investors use as simple valuation and comparative valuation guidelines.
In terms of how well each bank did against the previous quarter, Goldman Sachs was down 60%, Citibank down 29%, Wells Fargo down 21%, Morgan Stanley down 15%; surprisingly given the changed conditions, Bank of America was up 5% and JPMorgan was up 14%.
That wide dispersion is not all that unusual, showing that often it relates to a base-effect depending on whether the previous quarter was particularly good or bad as well.
But that also draws attention to the fact that different banks have different business models and much of their earnings are not related to what most people regard as banking activities but so-called investment banking or large-scale corporate deal-making.
So, maybe it is better to look at quarter-against-same-quarter-year-ago? This is especially true for companies where there is a pronounced seasonal effect.
Maybe the fourth quarter that includes December has fewer opportunities for deal-making? Those are: Goldman Sachs down 69%, Wells Fargo down 51%, Morgan Stanley down 39%, Citibank down 21% but, again, both JPMorgan and Bank of America were up 14% and 5% respectively.
Now the company researcher has to ask whether these differences are repeatable or not. Did they arise because of different business models or are they likely to be vulnerable to the pressures of the others just with a lag?
At the TTM level, the picture is a bit clearer. They are all down! Goldman Sachs 49%, Wells Fargo 37%, Citibank 31%, Morgan Stanley 24%, JPMorgan 21% and Bank of America 10%.
For the record, Goldman Sachs has announced significant layoffs, mainly in the corporate activity areas while JPMorgan is still hiring.
The point of this analysis is the confirmation that at an aggregate or index level, the earnings are declining which, together with rising interest rates, will provide for lower P/Es and hence lower index values — most important for ETF investors.
— Liston Meintjes is an independent consultant and analyst of business, economics and markets, with many years’ experience in the investment industry.
