In the stock market, nobody rings a bell at the top to tell you when the good times have peaked. It’s the same in banking, and the times right now are looking awfully sweet for the biggest U.S. behemoths.
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs all reported second-quarter earnings Tuesday. The results were overwhelmingly positive, although their stock-price reactions were mixed.
Goldman gained 9% on surging investment-banking fees and trading revenue. Citigroup dropped 5%, after management implied that returns in the second half wouldn’t be as strong as they were in the first. The others had less dramatic moves. Morgan Stanley reports results Wednesday.
All five banks topped earnings and revenue estimates. Each showed improved efficiency overall, with operating expenses declining as a percentage of revenue. Credit losses remained subdued.
Some of the numbers were cartoonishly good. JPMorgan’s annualized return on equity was 24%, when analysts were forecasting 19%. It got help from investment gains on its shares in Visa, which was a good problem to have. Goldman, too, reported a 24% return on equity.
JPMorgan Chief Executive Jamie Dimon said, “It’s getting close to as good as it gets. We just don’t know how long it’s going to last.” Jeremy Barnum, JPMorgan’s chief financial officer, said “the market is clearly extremely risk-on, and we’re kind of takers of that.”
If investors had a nit to pick with the biggest lenders, it would be with their net interest margins, which remain thin. This is the number, expressed in percentage terms, that shows the difference between the interest they earn on their assets and the costs they pay depositors and debtholders to borrow money.
Citigroup’s net interest margin improved modestly to 2.54%. Wells Fargo’s and JPMorgan’s fell slightly to 2.43% and 2.40%, respectively. Bank of America’s net interest margin rose slightly to 2.08%.
These lenders’ balance sheets are so large they can generate enormous profits even when net interest margins are relatively narrow. Historically, the biggest too-big-to-fail banks have been able to attract low-cost deposits by promising safety, but recently they have faced greater competition as customers seek higher yields on their money.
“In light of the fact that the rate environment is a little bit more hawkish, yield-seeking flows are still a factor and probably a little bit of a risk,” Barnum said.
There is no shortage of things that could go wrong, but for now they appear mainly to be of the geopolitical and macro variety. The Iran war is unpredictable. The artificial-intelligence boom could see a hiccup, along with the torrent of capital spending that has kept deals flowing. The economy and labor market have been remarkably resilient, and could turn suddenly. Higher, or lower, interest rates both carry their own sets of risks.
Meanwhile, the banks’ valuations look reasonable based on earnings, but more expensive compared with shareholder equity. JPMorgan trades for about 15 times earnings, well below the S&P 500’s market multiple. However, it commands a premium at three times tangible book value, which excludes intangible assets such as goodwill. Citigroup is at 14 times earnings and 1.3 times tangible book. Bank of America is at 14 times earnings and just over two times tangible book. Wells Fargo is at 12 times earnings and about 1.9 times tangible book.
On the surface there just isn’t much for shareholders to complain about. Wells Fargo’s earnings per share grew 25% last quarter from a year earlier. Bank of America’s grew 34%. All five banks reported billions of dollars in stock repurchases last quarter, which shareholders adore.
But it is when expectations are highest that even minor negative surprises can hit stock prices hard. Citigroup’s shares, which initially traded higher on Tuesday before the bank’s conference call with analysts, were a case in point.
The biggest risk is one common to all bull markets. They feel best right before the end, which can come with little notice. When it does, then the question for banks turns to which ones have the most durable balance sheets and capital cushions to absorb potential losses. The consensus leader there presumably remains JPMorgan. For now, though, the bull market remains business as usual. The music is still playing.
Write to Jonathan Weil at jonathan.weil@wsj.com