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Big banks’ second-quarter earnings support the case that the sector is “at a multi-year inflection point from negative to positive growth in revenue, operating leverage, and earnings per share growth,” says Wells Fargo analyst Mike Mayo.
The “five Ps” – central banks, capital markets, costs, credit, and capital – are at work in He made clear in a recent memo to clients that he stands by that finding.
He said central banks and interest rates were driving net interest income to a divergence in the second quarter from the fourth quarter and were likely to continue going forward. Capital markets showed their best improvement in three years. Costs showed a slight increase in operating leverage in the second quarter. Credit losses rose by just one basis point quarter-on-quarter. Capital levels were higher, leading to higher earnings and buybacks.
At the same time, he said, interest rates, recession and regulation “have probably peaked.” In addition, issues related to unrealized losses on securities have faded, helped by increases in tangible book value and a delay in the final Basel III rules.
May’s favorite stocks in this sector are Citigroup (New York Stock Exchange: J), American Bank (NYSE:BAC), and JPMorgan Chase Bank (New York: JPM). Next on his list is US Bancorp (NYSE:USB), PNC Financial Bank (NYSE:PNC), and State Street (New York Stock Exchange: Six).
Here are some of May’s comments on his favorite picks:
- Citi (C): “The 2025/26 ROTCE guidance gives us further confidence that the estimated 10%+ ROTCE by 2026E is achievable, and if so, Citi should trade toward a $110 total market cap in 2026.” On the other hand, the penalty the bank will pay to the Office of the Comptroller of the Currency is another “regulatory black eye” and suggests the consent order will not be lifted anytime soon.
- Bank of America: “We estimate net interest income to increase from $13.9 billion in 2Q24 to $15.1 billion by 4Q25, leading to $62 billion in 2026.” On fixed asset repricing, “a $20 billion asset inflow per quarter adds an estimated $300 million per quarter for several years (this could be reduced to $200 million assuming interest rates are lowered).” May estimates a one-time $400 million increase by 1Q25 and a $100 million per quarter for several years starting in 3Q25 on swaps.
- JPMorgan Chase (JPM): “Goliath is winning, given returns and risks.” May writes that a 20% return on core capital would be 20.5% or 23% with a lower CET1. Moreover, revenue continues to outperform peers. He notes that JPMorgan Chase still says it is over-earning and faces tail risk, but the bank “repurchased $5 billion in 2Q24, showed better rates than peers on deposits, and beat expectations in capital markets. It looks as if JPMorgan Chase can ‘win’ either because it is performing well or because its negative outlook has been proven correct.”
But Michael Gray, an analyst in South Africa, has a different view. After digging into the second-quarter results of Citigroup, JPMorgan Chase, Bank of America and Wells Fargo, he sees some disturbing trends – asset growth has stalled, deposits have shrunk, gross loans have flattened, net interest margins have declined and asset quality has deteriorated.
