The Right and Wrong Way To Survive a Pandemic

The US’ largest and third-largest banks, JPMorgan ($JPM) and Citigroup ($C), kicked off Q3 earnings with strong profits, better than expected results but falling stock prices.

Bank investors were hoping earnings reports would turn around bank stocks, which are still down over 30% in 2020. What they got instead were falling stock prices: JPMorgan fell 1.6% and Citigroup fell nearly 5% after the results.

The right way to survive a pandemic: JPMorgan

JPMorgan seems to be doing everything right but despite strong profits that are higher than their pre-COVID levels, its stock is still down over 25% in 2020.

• $9.4b profit in Q3 2020… Double from the quarter before and more than its Q3 2019 profit of $9.08b (pre-COVID).
• $611m loan reserves… Funds set aside to cover losses on loans that may not be paid back — lower than expected and much lower than the $10.5b set aside in the previous quarter.

It’s not personal JP, bank stocks are just out of favor… Banks are plagued by low interest rates and potential bankruptcies that could lower profits.

(Catchup: Here’s why bank stocks are still down over 30% in 2020)

The wrong way to survive a pandemic: Citigroup

Citigroup, whose stock is still down over 45% in 2020, actually reported earnings that were surprisingly not that bad. Its numbers are heading in the right direction: Profits were double their second quarter and beat market expectations.

However, instead of focusing on Citi’s better than expected results, investors penalized the bank for maintaining poor risk management standards that have led to fines and other expenses.

• $400m… The amount Citi was fined by regulators on Oct. 7 for not maintaining adequate risk management systems and infrastructure that identifies risk and protects customer data.
• $900m… The amount a Citi banker accidentally wired to one of its customers. Citi is going through expensive litigation to get the money back.

Investors are worried about the amount of money Citi will need to spend to bring its infrastructure up to standard.

For investors…If you’re looking to bet on a rebound in bank stocks, you might have to wait a bit longer. It seems like the only cure to banks’ low stock prices is a COVID vaccine and we’re unlikely to see one until at least, early 2021.