Written by Sergeo Domtchenko 

Quarterly financial reports often produce extremely turbulent market conditions. Earnings season breeds two types of investors. For example, you have the investors who sell/buy after a company releases weak/strong financials. On the other hand, you also have opportunists who aim to snap up companies at a discount.

Reporting season saw the Dow Jones pinball between lucrative gains and sharp losses, finishing the week at a mere 0.65% higher (at the time of writing).

The true extent of the Coronavirus is only just starting to sink in. Massive quarterly earning contractions among the major banks in both the U.S. and Australia sent markets tumbling on Tuesday.

In the U.S:

Financial Institution Share Price Reported Quarterly Earnings Contractions Weekly Gain / Loss
JP Morgan Chase & Co. (JPM) $87.33 -63% -9.9%
The Goldman Sachs Group, Inc. (GS) $177.04 -49% -2%
Wells Fargo & Company (WFC) $26.89 -89% -13.7%
Morgan Stanley (MS) $38.36 -12% -4.7%
Citigroup Inc. (C) $40.52 -46% 13.3%
Bank of America Corporation (BAC) $21.42 -50% -11.1%

In Australia:

Financial Institution Share Price Reported Quarterly Earnings Contractions Weekly Gain / Loss
Commonwealth Bank of Australia (CBA.AX) $61.06 -4.3% -0.8%
Westpac Banking Corporation (WBC.AX) $15.87 -16% 1.5%
National Australia Bank Limited (NAB.AX) $16.39 -13.6% 3.3%
Australia and New Zealand Banking Group Limited (ANZ.AX) $16.56 -7% 2.9%

Despite the weak earnings, three of the Big Four Australian Banks experienced a slight increase. In turn, the poor financials above, coupled with the ever- evolving pandemic is making investors wonder whether these banks are a wise investment?

Investing Based on the Fundamentals

Before I start, I am obliged to remind our viewers that this is not advice, only general commentary from my extensive research in this area.

There is no one standalone financial institution that trumps the rest (opinion not advice). Because some banks perform better than others in certain areas. Thus, I will be discussing the best banks for the respective fundamental sections below. Most importantly, the analysis below should allow our readers to make more informed decisions that best meet their investment goals.

1. Profitability & Return on Investment

It’s all well and good if your revenue is increasing. However, if your profits are not rising, why would someone invest?

Despite the U.S. banks earning more revenue, the Big Four Australian banks recorded exceptional net profitability ratios. For instance, net profitability averaged 33.1% for 2019, with CBA topping this at a whopping 37%.

Hence, it should come as no surprise that the average return on investment for the major Australian banks was 10.3%. However, this falls short when compared to JP Morgan’s return on equity ratio of 13.9% for 2019. Therefore, any investor who bases their investment decision on profitability and ROI should look at JP Morgan and the ‘Big Four’ Australian banks.

2. Dividends

Dividends can provide steady passive income and/or offset any capital losses. Westpac and NAB offer phenomenal dividend yields of 10.05% and 10.2%, respectively. If we look to the States, Wells Fargo is the leader in this department, with a 7.17% dividend yield.

However, based on the global trend, we should see the big US and Australian banks significantly reduce their dividends in the imminent future. If you are a long-term investor then the short-term impact of a dividend cut should not be concerning.

3. Future Earnings 

For long-term investors, the future earnings of a company will significantly influence whether you invest. An excellent way to measure this is by using the price-to-earnings ratio (P/E). It indicates a company’s capacity for revenue growth, and financial stability. Ultimately, reflecting how the company is being managed.

JP Morgan’s  (777.2) and Goldman Sach’s  (1697.8) P/E ratios captivated investors. Consequently, investors expect JP Morgan and Goldman Sachs to grow their earnings by 777 and 1697.8 times, respectively! Thus making Goldman Sachs and JP Morganthe more attractive investments for value investors.

Furthermore, when looking at Australia, CBA boasts a sensational P/E ratio, when compared to other banks, of 336.4. Therefore, CBA is the preferred Australian bank for long-term investors.

Summary

In conclusion, the COVID-19 pandemic has left us spoiled for choice in deciding which discounted blue-chip to snap up. Thus, irrespective of which blue-chip, you choose, it’s vital that you understand the companies financials. Above all, it’s critical that you know how behavioural economics is playing its part in moving the market.

Therefore , research on the fundamentals and people’s behaviour should minimise any losses while also maximising the potential gains.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Sergeo Domtchenko, Associate of YIG.

 

 

 

 

 

 

 

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