MorningWord 1/13/16 – Bank Shots (JPM, WFC, BAC)

by CC January 13, 2017 10:23 am • FREE ACCESS

We got results from a few of the largest moneycenter banks this morning. These stocks have been a big part of the stock market rally over the past few months on the dual assumptions of higher profits from rising interest rates combined with and assumption that financial regulations put in after the 2008 crisis will be weakened. As JPMorgan Chase CEO Jamie Dimon said on this morning’s call, we’re far enough from the crisis and the economy has enough momentum that it’s time for:

good, rational and thoughtful policy decisions to be implemented

That’s not surprising that the CEO of the largest bank in the world wants the man off his back. We won’t know the specifics of deregulation for a while but we are starting to get a sense how these institutions are faring with rising interest rates as this report was the first since the Federal Reserve raised interest rates in December. JPM:

The company on Friday reported fourth-quarter earnings of $1.71 per share on revenue of $24.333 billion.

Analysts expected JPMorgan Chase to report a profit of $1.44 per share on revenue of $23.949 billion, according to a consensus estimate from Thomson Reuters.

JPMorgan’s return on tangible common equity, a key performance measure, was 12.2 percent in the latest quarter. The bank’s full year net income came in at $24.7 billion, or $6.19 per share.

Yesterday, we previewed JPM eanrings and detailed a simple yield enhancement strategy. The idea was simple, bank stock had seen such a sudden sentiment shift that was unlikely to completely reverse. But an earnings beat would have to be pretty massive to get a euphoric move higher. Therefore an upside call sale made sense against long stock. Here was the overlay idea:

vs 100 shares long at $86.25 sell 1 Feb 90 call at 96 cents

The stock is higher by about 1.5% today. At 87.50 the Feb 90 call is worth about 1.00. So that’s a loss of just .04 versus gains in the stock of $1.25. That’s ideal and exactly how you want an over-write to act on an event. Implied vol is February is already lower by about 3%+ this morning and could fall even more. The ideal situation is for the stock to continue to creep higher towards 90 as the Feb 90 calls decay. Trade management on this trade is to be patient. If the stock reverses and goes slightly lower the short call will help slightly as it will decrease in value, if the stock goes higher the gains in the stock will continue to be much larger than any losses in the short call. The only thing to keep an eye on is if the stock threatens to go through 90, in that case a roll higher on the call would make sense.

JPM became the largest bank in the world last year, that was partly their growth, but also partly the result of the embarrassment that Wells Fargo faced after their phony account scandal. WFC also reported this morning, here’s how that looked:

The San Francisco-based institution saw profit of 96 cents per share against estimates of $1 from analysts surveyed by Reuters. That represented a 6.8 percent decline from $1.03 per share from the same period in 2015. Revenue was $21.58 billion against Wall Street estimates of $22.451 billion.

The bank is coming off one of the most difficult years in its 165-year history. Regulators fined Wells Fargo in 2016 for creating false accounts for some 2 million customers. In addition to the scandal, which involved a process known as cross-selling, the bank also failed its “living will” test with the Fed.

Wells Fargo’s issues are company specific at this point, so sentiment for this bank is different than the others. Yesterday we previewed the event and offered a hedge for those long the stock:

vs 100 shares of existing WFC stock at $54.40 buy the Apr 52.50 / 45 put spread and sell the Apr 60 call. The entire hedge costs 30 cents
  • Buy 1 Apr 52.50 put for 1.95
  • Sell 1 Apr 45 put at .40
  • Sell 1 Apr 57.50 call at 1.25

With the stock 56 this morning up $1.50 the hedge would cost 0.35 to close. A better trade management strategy for those worried about being called away could be to simply roll the short call a little higher, from the April 57.5 to the April 60. That roll would cost about .80 and would give the stock more room on the upside while keeping the protection in place. The protection makes sense for those worried about headline risk. If the stock reverses a bit from the earnings gains holders of the stock with this overlay can be patient as the hedge still makes sense until April.

Finally, Bank of America (BAC):

The firm reported earnings per share of 40 cents on revenue $19.99 billion. Analysts polled by Reuters expected Bank of America to report a profit of 38 cents a share on revenue of $20.85 billion.

said it expects a “significant increase” in net interest income for the current quarter. Revenue came in a touch below expectations.

Yesterday, we detailed a leverage overlay for those long the stock:

vs 100 shares of BAC (22.90) Buy the Feb 24/25 1×2 call spread for .06
  • Buy 1 Feb 24 call for .40
  • Sell 2 Feb 25 calls at .17 (.34 total)

With the stock higher by .30 the 1×2 is worth about .10, so it’s working well. But it’s hopes are dependent on the stock eventually getting above 24 by February expiration. If that doesn’t look likely it can be closed at a small profit or rolled lower.