It’s earnings season, and that means a slew of reports that give a snapshot into the health of corporations, including many of the top banks.
Beginning tomorrow with JPMorgan Chase (JPM) and continuing on Friday with Bank of America Corp. (BAC) and Citibank (C), analysts are expecting to see optimistic earnings.
But will that be enough?
First the good news.
- The KBW Bank Index, a closely-watched gauge of the banking sector, has outperformed the S&P 500 recently, underscoring investors’ optimism about earnings.
- Many banks are expected to take an accounting gain this quarter as a result of the declining value of their debt.
- Loan troubles have shown signs of moderating.
- Early-stage credit card delinquencies have steadily declined between April and June, leaving big issuers in a position to possibly draw down some of the vast amounts of cash they have stockpiled for future losses.
“[Credit] is probably the area where we’ve had some nice recovery,” said Bill Fitzpatrick of Optique Capital Management, which manages about $800 million in assets, including shares of many top banks.
But the article also brought out continuing concerns that are tempering expectations:
- A number of recent changes, including a new series of rules put in place earlier this year by the Federal Reserve on overdraft protection and credit cards.
- Sovereign debt troubles in Europe, as well as a bonus tax levied on bankers earlier this year by the British government — which will impact the U.K.-based operations of big U.S. banks — also threaten to weigh on banks’ results.
- Wild swings in the market have produced less than perfect trading results at the trading desks. This contrasts with the first quarter when JPMorgan, Goldman Sachs (GS), Bank of America and Citigroup, managed to make money from their trading desks in every one of the 64 business days.
- Overall revenue from stock and debt activity fell 24% to $7.9 billion in the second quarter from $10.4 billion in the previous quarter, according to research firm Dealogic.
Mortgage portfolios remain a puzzle all to themselves. While many analysts anticipate signs of stabilization in the mortgage portfolios of big banks — some warn that any improvement could prove temporary.
Earlier this month, pending home sales plunged by a staggering 30%, according to the National Association of Realtors. At the same time, prices within some of the biggest housing markets have barely budged from their historic lows, based on industry data.
In addition, loan demand still remains tepid at best. Last week, the Federal Reserve reported that the total amount of outstanding consumer credit fell a seasonally adjusted $9.1 billion to $2.4 trillion, marking its fourth consecutive month of declines.
And finally, there’s the issue of financial reform. Analysts and investors are likely to focus even more on just how much the proposed new rules for the financial industry will squeeze bank profits going forward.
As reported in the New York Times, JPMorgan Chase could see almost every aspect of their business affected by the new reforms in the proposed Dodd-Frank act.
The bill, which has moved to the Senate for a final vote, would impose stricter consumer lending guidelines and lower transaction fees on debit cards. In that regard, the bill would affect most of the nation’s top banks.
That also appears to be a question without any easy answers. For one, the bill has yet to pass the Senate and reach President Obama’s desk. What’s more, experts said any legislation will merely serve as a guide for federal regulators who need to draft actual rules for the industry.
Investors, as a result, are unlikely to get any insights into what exactly this will mean for banks’ debit card business, trading operations and other units affected by reform.
“Financial reform is coming to a close,” FBR Capital Markets analyst Paul Miller said in a recent note to clients. “Clarity is not.”
