The biggest US banks will kickstart the earnings season for the last quarter of 2021, with JP Morgan Chase, Wells Fargo and Citigroup reporting their financial results on Friday before Wall Street’s opening bell. The banking behemoths are expected to close the year on the front foot, capitalizing on the elevated investment banking fees and the significant progress in the reduction of non-performing loans (NPLs) during the pandemic. In addition, the current economic environment seems favorable for the banks as the markets are pricing in three rate hikes by the Fed in 2022, which will probably result in wider net interest margins. Therefore, the consensus recommendation from Refinitiv analysts is “buy” for the three banks.

Q4 performance is mixed despite a strong 2021

Although the three banks’ financial figures are not anticipated to steer in the same direction in Q4, the overall outlook for the banking sector seems to be constantly improving. In 2021, financial firms realized substantial profits from trading fees as trading activity skyrocketed mainly due to the booming stock markets. Furthermore, the soaring interest for profitable stocks led to higher demand for mergers and initial public offerings, which further boosted the banks' revenue from investment banking fees.

Additionally, most banks had set aside significant reserves as they feared that the pandemic would largely weigh on NPLs. However, the financial damage caused by the NPLs proved to be smaller than expected, enabling the banks to amplify their earnings by releasing significant amounts of their reserves. Finally,  the banks could potentially benefit from the three anticipated rate hikes by the Fed in 2022, which will probably broaden the net interest margins. Net interest margins for the banks are calculated as the difference between the interest income generated by long-term assets such as loans and the interest expense paid to short-term liabilities such as deposits.

On the downside, some major US banks’ stocks got hit by low interest rates in 2021, which made growth stocks and especially tech stocks far more appealing. Also, major banks might soon experience employee shortages as most of them are planning to fire their unvaccinated staff.

JP Morgan had a solid 2021 but Q4 estimate seems sluggish

Although JP Morgan had a solid performance in 2021, the bank might experience a minor pullback in the last quarter. Nevertheless, 2022 presents multiple tailwinds for the bank including loan growth, which slumped during the pandemic, alongside higher interest rates that increase the banks’ net interest income. Also, the bank's upcoming investments in areas like technology and the planned expansion of its investment banking and loans divisions may prove to be catalysts for higher earnings in the future.

The banking giant is anticipated to post revenue of $29.85 billion, according to consensus estimates by Refinitiv IBES, which would represent a marginal year-on-year decline of 1%. In addition, Earnings per share (EPS) are estimated to fall to $2.97, decreasing by 21.5% on an annual basis.

As for any potential surprises, the company has a strong history of outperforming expectations, having beaten revenue projections in seven out of the eight preceding quarters.

Can the stock rally resume in 2022?

After a blockbuster 2021 in which JPMorgan’s stock price rose by almost 25%, investors will be closely eyeing the bank’s Q4 earnings release for signs of further upside potential.

In the positive scenario, solid earnings could propel the price towards $169.50. Successfully breaching this region, the price might then test the $173 barrier.

On the flipside, should the financial figures disappoint, the bears might aim at $163.50 before the price declines towards $157.50.

Wells Fargo stellar performance is likely to continue in 2022

Wells Fargo is primarily a lending financial institution. Hence, it is more sensitive to interest rate fluctuations relative to other banks. Therefore, the Fed’s faster interest rate hiking timeline will probably prove beneficial for the bank. Furthermore, the bank’s initiative to reduce expenses and decrease its efficiency ratio seems to be materializing as it is set to report historically low quarterly expenses in the final quarter of 2021, further boosting its profits.

The fourth largest US lender is expected to report earnings of $1.10 per share in the final quarter of 2021, which would produce a 72% year-on-year growth. Moreover, revenue is also projected to rise by 4.4% on a yearly basis to $18.70 billion but marginally decline from its Q3 figure.

Finally, it should be stated that Wells Fargo has outperformed earnings estimates by 29.5% on average in the previous two quarters.

Does the stock have unlimited upside?

The increasing odds for higher interest rates and tighter monetary policy appear to have positively affected the bank’s stock price not only in 2021 but also at the beginning of 2022.

Should the company announce better-than-expected financial results, the price might charge higher to test the $60 psychological mark, before it ascends towards the 2017 high of $66.

Alternatively, weaker-than-expected earning figures may ignite selling interest for the stock, sending it to test the $52 hurdle. Failing to halt there, the price could dip towards $46.20.

Citigroup aims for recovery in 2022

Citigroup struggled in 2021 for a wide range of reasons. Firstly, the bank shut down its operations in South Korea and other emerging markets to focus on higher-growth areas. This action might eventually prove beneficial, but it has not yet led to an acceleration of revenues. Additionally, the bank faced regulatory issues after it accidentally sent $900 million to wrong recipients due to a clerical malfunction.  Therefore, this action did not only lead to a $400 million fine but also significantly damaged the bank’s reputation and trustworthiness. Nonetheless, in the last quarter of 2021, Citigroup has managed to narrow the performance gaps against its peers, mainly due to the outperformance of its investment banking division.

The New York City-based investment bank’s revenue is projected to reach $16.78 billion, up 1.7% compared to the same quarter a year ago. However, EPS is expected to decline to $1.38, representing a 34% decrease on an annual basis.

Stock price in recovery mode

From a technical perspective, the stock seems to be bouncing back.

Should the price charge higher, initial resistance might be encountered at the $69.50 region before the price challenges the $73.50 barricade.

If the negative scenarios play out, the $64.20 level, which overlaps with the 50-day simple moving average (SMA) could be the first obstacle for the bears. Piercing through this resistance point, the price might dip towards the $60 psychological mark.

Citigroup remains the most undervalued

All the three examined banks have forward 12-month price to earnings (P/E) ratios that are reasonable to the financial sector’s average of 11.86, indicating that they are fairly priced.  Hence, Citigroup has increased future growth prospects against its peers as it has the lowest P/E ratio.