Bank earnings kickoff: Hightower's Stephanie Link on the key takeaways

Key Concepts

• Net Interest Income (NII): The difference between the revenue a bank generates from its interest-bearing assets and the expenses it pays out to depositors.
• Return on Tangible Common Equity (ROTCE): A profitability metric measuring how well a bank is generating profits from shareholders' equity.
• Asset Cap: A restriction placed on a bank’s ability to grow its balance sheet, imposed by regulators.
• Book Value: The net asset value of a company, calculated as total assets minus total liabilities. Price-to-Book (P/B) ratio is a valuation metric.
• Charge-offs: Debts that a lender deems uncollectible and writes off as a loss.
• Global Wealth Management: The division of a financial institution focused on providing investment and financial planning services to high-net-worth individuals.
• Sales and Trading: A division within an investment bank responsible for buying and selling securities for clients and for the bank's own account.

Bank Earnings Analysis: Wells Fargo & Bank of America – Q1 2024 Performance

I. Wells Fargo – Solid Fundamentals & Future Growth Potential

The discussion began with an analysis of Wells Fargo’s recent earnings report. While the Net Interest Income (NII) slightly missed expectations, Stephanie Link, Hightower Chief Investment Strategist, characterized the overall report as “really solid.” She emphasized the significant growth potential unlocked by the lifting of the asset cap imposed in 2018. This cap restricted the bank’s ability to expand its balance sheet and, consequently, its growth.

Specific details from the report included:

• Profit Growth: Profits increased by 6% year-over-year.
• Net Charge-offs: Decreased, indicating improved credit quality.
• Corporate Investment Banking: Grew 14% year-over-year and 6% sequentially.
• Wealth Management: Experienced 6% growth.
• ROTCE: Rose to 15%, approaching the medium-term target of 17-18%.
• Stock Buyback: $5 billion worth of stock was repurchased in the quarter, representing 10% of the market capitalization, with continued buybacks planned.

Link advocated for a “buying opportunity” on any weakness in the stock, noting its 31% increase over the past year. She believes the market hasn’t fully priced in the growth potential following the removal of the asset cap.

II. Bank of America – Outperformance & Valuation Advantage

The conversation then shifted to Bank of America’s earnings. The bank exceeded expectations on both net income and total revenues. Key highlights included:

• Bottom & Top Line Beat: Bank of America surpassed analyst estimates for both earnings per share and total revenue.
• Decreased Charge-offs: Sequential decline in charge-offs, signaling improved asset quality.
• Investment Banking Improvement: Investment banking performance exceeded prior guidance provided just a month earlier.
• Revenue Growth: Total revenues grew by 7%.
• Net Interest Income: Increased by 10%.
• Global Wealth Management & Sales and Trading: Both segments experienced 10% growth.
• Average Loans: Increased by 8% across all business lines.

Link described Bank of America’s performance as “by far the best of the big three” (referring to major US banks reporting earnings). She highlighted the positive surprise of outperformance across multiple business segments.

A key point of comparison was the valuation: Bank of America trades at 1.4 times book value, while Wells Fargo is at 1.8 times book value. This suggests Bank of America may be undervalued relative to its peers.

III. Strategic Implications & Investment Perspective

Link’s overall perspective is bullish on both Wells Fargo and Bank of America. She believes Wells Fargo’s growth story is just beginning, with significant potential for profitability improvement as it reinvests capital freed up by the lifting of the asset cap. She anticipates the ROTCE target of 17-18% could be revised upwards.

Regarding Bank of America, she expressed surprise at the extent of its outperformance and believes the stock’s current price doesn’t fully reflect its strong results. She emphasized the broad-based growth across all business lines as a particularly positive signal.

IV. Connecting the Dots & Market Context

The discussion highlighted the broader context of mortgage rates, which had recently moved above 6% but remained lower than the previous year. This backdrop influences bank profitability and lending activity. The earnings reports from Wells Fargo and Bank of America provide insights into how banks are navigating this environment. The anticipation of Morgan Stanley’s earnings report (scheduled for the following day) was also noted.

Conclusion

The analysis presented a positive outlook for both Wells Fargo and Bank of America, driven by strong earnings reports and favorable future prospects. Wells Fargo is positioned for significant growth following the removal of its asset cap, while Bank of America demonstrated broad-based outperformance and appears undervalued based on its price-to-book ratio. Stephanie Link’s perspective emphasizes the importance of recognizing these opportunities and utilizing any short-term weakness as a buying opportunity.