There are quite a few positive takeaways from the latest string of earnings results released by the biggest banks in the US, which officially kicks off the current reporting season. As we know, banks tend to be close proxies for the broader economy. And their robust results and upbeat outlook underscore confidence in both consumers and businesses — and should alleviate some of the worst fears of an economy that is stagnating even as inflationary pressures grow. US stocks rebounded from the recent selloff, partly bolstered by the strength of these earnings results.
US consumers and businesses are, by and large, flush with cash, coming out of the Covid-19 pandemic that saw record government stimulus-relief spending. We have written previously about how governments around the world, and especially in developed economies, have effectively socialised private debts.
A case in point: The release of loan loss reserves was a major factor behind the strong bank earnings. These are the reversals of provisions made last year, in anticipation of higher default rates when the crisis hit — but not ultimately needed. Unlike in the aftermath of the global financial crisis, the average American household emerged from the pandemic with its balance sheet intact, if not stronger.
Generous government handouts as well as limited spending avenues during the outbreak translated into huge excess savings and a spike in the personal savings rate, to as high as 33.8% in April 2020. With the reopening, the savings rate has fallen back sharply in recent months, to 9.4% in August 2021, but this is still the highest level since December 2012.
Banks are now seeing the normalising of excess deposits, and credit card outstanding balances indicate that customers are starting to carry debt instead of paying off their borrowings. As JPMorgan Chase CEO Jamie Dimon puts it, “people are eager to spend and borrow”. Indeed, US retail sales rose in September, contrary to market expectations for a slight decline, as consumers stepped up spending despite a renewed surge in Covid-19 cases and rising prices.
Similarly, corporate bankruptcies during the pandemic were actually lower than in the average, pre-crisis years, thanks to various government support packages. Most businesses — except for those critically affected by lockdown measures, such as airlines and those in the hospitality sector — have stockpiled cash. And they are now spending on new investments, for machinery, equipment and technology, including digitalising operations. Others are tapping unused credit lines and, importantly, all the biggest banks reported strong advisory fee income generated from active mergers and acquisitions — and have indicated that the pipeline for deals remains robust. These are all signals of confidence in the durability of the economic recovery.
All of the above bodes well for the US economic outlook, at least for the foreseeable future — and justifies our higher weightage target for financial stocks. In addition, banks tend to do well in a rising interest rate environment — a steeper yield curve will boost net income margins.
Our investment in Bank of America has performed very well. It has gone up nearly 85% since we acquired the stock a little over a year ago (in August 2020). The bank reported net profit growth of 58% y-o-y for the quarter ended September 2021.
We recently added JPMorgan Chase & Co — the biggest consumer bank in the US — and Wells Fargo & Co to our Global Portfolio. Wells Fargo reported 59% y-o-y net income growth for the latest quarter, despite the US Federal Reserve’s cap on its assets (imposed in 2018, following the bank’s sales practice scandal). The cap could be lifted next year and, if so, this would boost loans growth.
In addition to traditional banks, we acquired fintech PayPal as well as global payments processor Mastercard last week. Among the consumer behavioural changes that will persist well beyond the pandemic is the accelerating adoption of e-commerce and contactless digital payments at bricksand-mortar shops. Both companies are also beneficiaries of rising consumer and business spending.
PayPal is a leading player in the global payments network, linking merchants (32 million active accounts as at end-June 2021) and consumers (371 million active users). The network effect of its 403 million active accounts is clearly a major competitive advantage, which PayPal continues to build upon. It recently launched a mobile super app that includes features such as peer-to-peer transactions, in-app shopping tools and QR scan, cryptocurrency trading, buy-now-pay-later, bill payments and access to high-yield savings account. The company also expanded its merchant base to include point-of-sale solution and working capital loans for small businesses. Management estimates total payment volume to grow 33% to 35% y-o-y in FY2021 on the back of 52 million to 55 million net new active accounts, translating into revenue growth of 20% and earnings growth of 21%.
Mastercard is another key beneficiary of rising consumer spending as economies reopen, both in the US and overseas, and with the gradual lifting of travel restrictions. The company has consistently grown revenue, profits and cash flow over the past decade. Net revenue was up 36% y-o-y from US$3.3 billion ($4.4 billion) to US$4.5 billion in the recent 2Q2021 while earnings increased 46%. The company recently jumped on the increasingly popular buy-now-pay-later bandwagon, with its Mastercard Installments programme (initially available in the US, UK and Australia) for both in-store and online purchases.
Meanwhile, we disposed of half of our existing holdings in Builders FirstSource and General Motors Co. The former has far outperformed the broader market, gaining almost 138% since we acquired the stock in November 2019. As such, we deemed it prudent to lock in some profits.
Shares in General Motors, on the other hand, have been treading water in recent weeks. We think the company will do well in the longer term — and its valuations are attractive — on aggressive investments in electric and autonomous vehicles. But the shortage of semiconductors is dragging on longer than expected and hampering production. That is dampening near-term investor sentiment.
The Global Portfolio was up 3.3% for the week ended Oct 20. Bank stocks outperformed the broader market — Bank of America (+9.2%), Wells Fargo (+8.9%) and JPMorgan (+6.1%) were among the top gainers last week. Shares in Alibaba Group Holding (+9.1%) continued to rebound from the recent sharp fall. At the other end, Airbnb (-2.2%), Singapore Airlines (-2.2%) and The Walt Disney Co (-1.4%) were the notable losers. Total returns since inception now stand at 68.9%, outperforming the benchmark MSCI World Net Return Index, which is up 60% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Photo: Bloomberg
