Deep Dive: JPMorgan Chase is the only one of the biggest 10 U.S. banks that has these 2 things going for it

Earnings season is also earnings estimate revision season — these changes can be especially useful now, because they bake in more of the expected increases in funding costs, as depositors move money to banks paying higher interest rates, move into certificates of deposit or consider other alternatives, such as money-market funds.

Let’s take a look at how consensus estimates for earnings per share have changed for the largest 10 U.S. banks by total assets:

Click on the tickers for more about each bank.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The movement of consensus EPS estimates is important to investors, because consistent upward revisions can support rising share prices. Stock buybacks can help this process, as reducing the share count boosts EPS. But during a time of uncertainty, while the Federal Reserve conducts its annual stress tests on the largest banks, buybacks (and dividend increases) may be off the table for the rest of 2023.

Four numbers are bolded in the table above. JPMorgan Chase & Co.
JPM,
-1.34%
is the only one among the largest 10 U.S. banks whose consensus EPS estimates for 2023 and 2024 have increased since the end of last year. And Charles Schwab Corp.
SCHW,
-0.98%
has seen the largest declines in the EPS estimates, by far.

To underline how the full effect of increased borrowings to make up for deposit outflows can affect Schwab, consider these numbers:

• Schwab had $52.7 billion in short-term borrowings as of March 31, up from $17.1 billion as of Dec. 31 and $4.2 billion as of March 31, 2022.

• Its net interest revenue (interest income less interest expense) for the first quarter was $2.77 billion, down from $3.03 billion the previous quarter but up from $2.14 billion in the year-earlier quarter.

• Schwab’s net yield on average interest-earning assets, as calculated by FactSet, increased to 3.07% in the first quarter from 2.59% in the fourth quarter and 1.92% in the first quarter of 2022.

• Schwab’s return on average assets improved to 1.21% in the first quarter from 1.18% the previous quarter and 0.93% in the year-earlier quarter.

There are a lot of good numbers in the list above, but during the company’s “business update call” on April 17, Schwab chief financial officer Peter Crawford said that the company had nearly doubled its “cash on hand during the month of March” by increasing borrowings and issuing more CDs, according to a transcript provided by FactSet.

That means the above list of numbers doesn’t reflect a full quarter of higher costs for CD deposits and borrowings.

On the other hand, Schwab CEO Walter Bellinger said: “Hopefully, it is also well understood that as these borrowings are paid off, that will be an accelerant to our medium-term earnings.”

On another positive note when discussing the borrowings, Crawford said, “we could see this roll off very, very quickly, even as we start to see a resumption of deposit growth over the course of latter part of 2023 and then into 2024.”

But as you can see on the table above, analysts as a group aren’t yet convinced Schwab’s increase in funding expenses will reverse quickly.

Deusche Bank analyst Brian Bedell rates Schwab’s stock a “buy,” with a $72 price target, which is 33% higher than the closing price of $54 on April 20.

In a note to clients on April 18, Bedell wrote that “the earnings impact from higher cost funding, a more liquid balance sheet, and suspension of share repurchase is substantial, and is now more likely to drive an EPS decline this year, in contrast to a ~20% EPS growth outlook before the March banking crisis – and we estimate these factors have reduced longer-term EPS by 10-15% vs. prior estimates, for 2024-25.

But he also believes the decline in Schwab’s stock has been overdone “in the context of a solid mid-teens long-term EPS growth profile.”

Going back to the top of the list, Oppenheimer & Co. analyst Chris Kotowski rates shares of JPMorgan Chase “outperform,” with a price target of $192 — 36% above the closing share price on April 20.

Kotowski wrote that JPM’s cautious guidance in its first-quarter earnings release “was grounded against a large list of near-term uncertainties, including deposit repricing, potential recession of varying severity and the monetary policy environment, all of which will have interrelated impacts on loan growth and deposit outflows.”

Here’s a summary of opinions about the largest 10 U.S. banks among analysts polled by FactSet, along with forward price-to-earnings ratios based on consensus EPS estimate for the next 12 months:

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