Both companies would benefit from a recovery, no doubt. They wouldn’t have to reserve as much money for anticipated credit losses, and they could take back some of the money already set aside. They could also resume purchases of their own shares, something regulators halted during the pandemic.
Keefe Bruyette & Woods analyst Brian Kleinhanzl says investors have already given JPMorgan (JPM) credit for these trends, while they have not yet done so for Citi (C).
JPMorgan shares fell 0.6% on Thursday, while Citi shares rose 1%.
The banks beat expectations for third-quarter earnings, partly because of improved credit trends, though executives warned that uncertainty persists and the economy needs another jolt of stimulus to get through the crisis.
KBW downgraded JPMorgan to Market Perform from Outperform because the stock has done so well, there’s little upside left. JPM shares have performed better than other banks, down 16.7% versus 37.2% for its peer group this year, according to Kleinhanzl.
in comparison, is up 10.3% this year.
Improving trends in credit next year means JPMorgan should be able to release some of its loss reserves, which will boost earnings per share. But those expectations are already reflected in the share price, Kleinhanzl wrote in a note on Thursday. Over the next 12 months he “does not see catalysts that will move the shares materially higher versus peers.”
He raised his per-share profit estimate for JPMorgan for the next few years to factor in expected stock buyback activity. For 2020, he raised estimated EPS to $7.37 from $7.27, for 2021 to $9.79 from $8.35, and for 2022 to $11.45 from $10.50.
On the other hand, he flipped his rating on Citigroup, to Outperform from Market Perform, for the opposite reason. Citi shares have lagged their peer group of universal banks this year, falling 36.5% versus a fall of 15.9% for its peer group.
Improving credit trends that should boost Citi’s bottom line next year are not reflected in its price, Kleinhanzl said. And Citi has some expenses after regulators fined it $400 million over deficiencies in its risk management systems.
Kleinhanzl raised his estimate for Citi’s 2021 per-share profit to $7.14 from $5.75 and for 2022 to $9.73 from $7.85. The increases assume lower credit expenses. Stock buybacks will also likely return, he said.
The analyst is “expecting that the U.S. will return to a period of stable economic growth as vaccines become more widely available.” Stable growth will boost earnings.
Kleinhanzl also changed his ratings for
Bank of New York Mellon
(STT), citing similar trends. He cut BNY to market perform from outperform and raised State Street to outperform from market perform.
Write to Liz Moyer at [email protected]