Size Matters (Banking Edition)

In case we needed another reminder, this morning’s results from JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and PNC Financial (PNC) reiterated the message that when it comes to the banking business, bigger is better.  All four handily beat their analyst consensus, but one is trading lower.  Care to guess which?

Spoiler alert: as I write this, before midday, C, JPM and WFC are all 3% higher while PNC is -1.5% lower. 

While all four of the banks mentioned above have enough systematic importance to qualify for the Federal Reserve’s annual stress tests, PNC is not considered to be of global systematic importance.  It also lacks the capital market exposure that helped bolster the earnings of its larger peers.  All benefitted from smaller than expected loan loss provisions, but there are some significant differences in perception that help the larger banks.

JPM is rightly viewed as a juggernaut, which is why investors are not perturbed by some uncomfortable comments from its Chairman, Jaime Dimon.  Among them:

• “We’ll have to reprice some deposits at some point” – meaning that the “too big to fail” banks are still benefiting from the money flows that occurred during this year’s banking crisis.  Either through fear or inertia, JPM can still retain deposits while paying rates well below market.  On the plus side, that clearly helped them achieve record interest income in the meantime.
• The impending required capital increases that stemmed from the loan guarantees that prevented several shaky regional banks from failing in March, will be a “major headwind” to returns. 
• “This may be the most dangerous time the world has seen in decades.”  OK, but we have discussed various times that equity investors are not particularly adept at evaluating geopolitical risks, so they tend to overlook them.
• “Consumers are spending down their excess cash buffers.”  This is not great news for the economy, and probably a contributing factor to today’s disappointing University of Michigan sentiment report of 63, which was well below last month’s 68.1 and the 67 expectation. 

In the cases of WFC and C, investors are particularly encouraged by their ongoing turnarounds: WFC from episodes of customer abuses; C as it transitions to the new leadership of Jane Fraser.  A key noteworthy announcement from Citi is that it intends to eliminate five layers of management.  While that sounds as though it could be costly thanks to large severance payments, investors like the idea of streamlining the bank’s cost structure.

Yet PNC also announced a headcount reduction of 4% that they hope will save them $325 million.   Markets don’t seem enthusiastic about that, and instead seem perturbed that revenues came in slightly below estimates. 

It seems to me that the main takeaway from today’s bank results is that investors view the banks through two distinct lenses: one for the largest “money center” banks, and another for all the rest – including even the largest super-regional banks.  At some level this fits with the market’s overall mindset.  We all know about the market dominance of the so-called “Magnificent Seven”, the cadre of mega-cap tech stocks that seemingly constitute its own market sector, and noted that the forward P/E of those stocks was recently at 27, well above the 16 sported by the other 493.  Investors are paying a premium for market dominance.  Why wouldn’t that extend to the banking sector?