As Q3 earnings season kicked off last week, the market received a scare when negative news about two small regional lenders broke.
Auto parts lender First Brands filed for Chapter 11 bankruptcy protection with around $6.1 billion in debt on its books, while Tricolor—a subprime auto lender and dealer—filed for Chapter 7 bankruptcy citing alleged systemic fraud.
In response, JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon issued a warning about looming private credit risks in the economy, stating that “when you see one cockroach, there are probably more.”
But the operative words there are “private credit.” And when it came time for the publicly traded big banks to report, their earnings proved that the likes of First Brands and Tricolor aren’t a contagion that will impact the banking industry broadly.
Big Banks Demonstrated Big Q3 Financial Results
Though the financials sector has performed fifth best among all 11 S 500 sectors this year, its 9.23% year-to-date (YTD) gain trails the index. Some of that can be attributed to a poor year from the insurance industry, whose stocks fall under the financials’ umbrella.
Large cap insurers like Progressive (NYSE: PGR), Marsh & McLennan Companies (NYSE: MMC), and UnitedHealth Group (NYSE: UNH)—with YTD losses of nearly 8%, 11%, and 28%, respectively—helped drag down the overall sector.
However, despite financials’ relative underperformance compared to the market, there’s been one notable exception: big banks, which proved that they’ve been up to business as usual when they reported Q3 earnings last week.
JPMorgan Chase crushed forecasts. Quarterly revenues of $46.4 billion showed around 9% year-over-year (YOY) growth, while earnings per share (EPS) of $5.07 grew by 16% YOY, beating analysts’ estimates of $4.83 by more than 10%. Annualized, the bank’s EPS is expected to grow 7.29% next year.
It was a similar story for Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS), and Wells Fargo (NYSE: WFC), all of which beat on Wall Street analysts’ top and bottom line expectations. Meanwhile, Citigroup (NYSE: C) missed EPS forecasts by just 3 cents and Goldman Sachs (NYSE: GS) missed on revenue expectations despite its $11.33 billion quarterly figure representing a 19.5% YOY increase.
So it’s no surprise that those stocks have not only outpaced the S 500 this year, but almost all of them have trounced the market with the following YTD gains:
- BAC: 16.32%
- WFC: 20.76
- JPM: 23.79%
- MS: 27.61%
- GS: 32.00%
- C: 40.48%
Of course, Q3 is in the rearview mirror. But isolating some key themes that emerged from the big banks’ reporting provides hints about what investors can expect in Q4 and beyond.
Key Takeaways From Big Banks’ Earnings Calls
One significant theme among all of those aforementioned banks was a surge in investment banking fees as well as trading revenue. Much of that is due to significant increases in mergers and acquisitions (M) activity and an…
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