Financial stocks slip following cautious comments by JPMorgan, Ally

Meanwhile, the Fed said on Tuesday that “material changes” are warranted to bank capital requirement proposals

Shares of several banks and financial services companies are trading lower on Tuesday following cautious comments by JPMorgan (JPM). President Daniel Pinto believes Wall Street analysts’ expectations for expenses and net interest income are too optimistic. This comes after Goldman Sachs (GS) said on Monday that trading revenue was on track to drop 10% in Q3.

Meanwhile, Ally Financial (ALLY) told investors that auto delinquencies and net charge-offs were up more than expected, which sent the stock into negative territory in its biggest hit since early 2020.

TOO OPTIMISTIC: 

JPMorgan’s President Daniel Pinto said on Tuesday that he believes Wall Street analysts are being too optimistic when it comes to their view on next year’s expenses and net interest income at the firm. Speaking at an industry conference, the executive said that the current net interest income estimate of $89.5B is “not very reasonable.” The figure “will be lower,” he said. JPMorgan sees Q3 markets revenue flat to up about 2% year-over-year and “solid” quarter for investment banking. The bank also added that the quarter is “doing fine” so far and provided no change in guidance for credit card net charge-offs.

Commenting on the presentation, Keefe Bruyette said that for capital markets overall, JPMorgan’s guidance is 21c per share light to KBW’s and 8c light to the consensus estimates for Q3. The firm has a Market Perform rating on the shares with a $211 price target.

TRACKING DOWN: 

At the Barclays Global Financial Services Conference on Monday, Goldman Sachs CEO David Solomon stated that, “The operating environment has been good. In particular, our client franchise, has been very, very strong. I think with respect to the quarter, I would highlight a few things. First, with respect to trading, I would say that with FICC and equities, we had an extremely strong third quarter in 2023. And given this quarter, given what I’d say is a more challenging macroenvironment, particularly in the month of August, that business is trending down close to 10% largely due to FICC.

“Second, we continue to reduce the private equity and alternatives on balance sheet investing and we’ve made very, very good progress. Obviously, as we do that, the revenues from those activities are going to come down and move toward the medium-term targets we set out for that. This quarter, there were a handful of positions that are leading to those line items being significantly more muted.”

MORE DELINQUENCY THAN EXPECTED: 

Also speaking at the Barclays Global Financial Services Conference, Ally Financial said that auto delinquencies and net charge-offs were up more than expected, with credit challenges having intensified over the course of quarter. Ally committed to 15% ROTC target, says it is on track for fee income to be up 12% for the year, and that while it sees net interest margin declining in Q3, it has “a lot of conviction” around a 4% net interest margin trajectory. The bank noted that borrowers are struggling with high inflation and cost of living

In a research note following Ally’s presentation, RBC Capital highlighted the company’s expectation for higher delinquencies and net charge offs, or NCOs, in Q3 due to some pressures on their 2023 vintage. On the margin outlook, the prior guidance called for sequential quarterly margin expansion of 5 to 15 basis points, but now the margin is expected to decline on a sequential basis for Q3. RBC, which says “this all seems manageable,” adds that higher credit costs and a lower margin will pressure numbers in the near term and “that is a disappointment for the company.” The firm would expect the stock to be under pressure, but maintains an Outperform rating and $49 price target on Ally shares.

MATERIAL CHANGES: 

Meanwhile, away from the conference, Federal Reserve Vice Chair for Supervision Michael Barr stated in a speech to be presented at the Brookings Institution on “The Next Steps on Capital” that, “It is critical that banks have the capacity to continue lending to households and businesses through times of stress. Bank capital is a key component of this resilience. And bank capital rules help to ensure that banks are holding capital commensurate with the risks of their activities and the risks that they pose to the U.S. financial system. But capital has costs too. As compared to debt, capital is a more expensive source of funding to the bank. Thus, higher capital requirements can raise the cost of funding to a bank, and the bank can pass higher costs on to households, businesses, and clients engaged in a range of financial activities. These activities are critical to a well-functioning economy that works for everyone… Today, I’ll return to these themes in the context of two rules of great public interest: The Basel III endgame proposal and the proposal to adjust the capital surcharge for global systemically important banks – G-SIB.

“A little over a year ago, the Board sought comment on those two proposed rules, which would modify risk-based capital requirements for large banks… This process has led us to conclude that broad and material changes to the proposals are warranted… The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received. The changes to the endgame proposal have been a joint effort with my counterparts at the FDIC and the OCC. I intend to recommend that the Board re-propose the Basel endgame and G-SIB surcharge rules. This will provide the public the opportunity to fully review a number of key broad and material changes to the original proposals and provide comment. We will accept public comments on any aspect of the Basel endgame and G-SIB surcharge proposals.”

PRICE ACTION: 

In afternoon trading, shares of JPMorgan have dropped almost 7% to $202.15, Goldman Sachs and Citi (C) have slid over 5% to $463.90 and $46.79, respectively, Morgan Stanley (MS) and Bank of America (BAC) have slipped about 3% to $95.52 and $38.37, respectively, and Wells Fargo (WFC) has dropped 2% to $53.48. Also lower was Ally Financial, with shares plunging 19% to $32.27 on Tuesday.

—

Originally Posted September 10, 2024 – Financial stocks slip following cautious comments by JPMorgan, Ally

Go Source