We have now reached the end of earnings season for the major banks, so looking back on the results collectively is now appropriate to assess collective performance. Earnings season can be a rally cry for a bull market, or a deadening lull towards a bear – this quarter’s earnings gave us a bit of both.
The debate over the rationality of markets can continue forever, but there is one truth to all market observers: investor sentiment does not always match a company’s results. In recent memory, there have been banks publish earnings beating estimates, only to see their stock price fall. Likewise, there have been cases of banks falling short of estimates, yet their stock price rose immediately after disclosing.
JPMorgan Chase (NYSE: JPM) kicked off the season for the banks, and Wells Fargo (NYSE: WFC) provided the bookend. In the middle, we saw Citigroup (NYSE: BAC), Bank of America (NYSE: BAC), and Goldman Sachs (NYSE: GS). With some banks ‘winning’, while others ‘losing’, we still do not have a clear picture of the economy or the future of the banking sector. Now that financial regulatory reform has been signed into law more changes are to come – however, some of these changes will take nearly a decade to implement.
Therefore, we must focus on the now for the banking sector. In each disclosure, there was a common trend – market volatility hurt trading revenues, and loan loss write-offs are down. While these elements served as barely single sentence disclosures in each of the statements, they parlay an important theme: fewer loans are turning bad, but investor confidence is still down.
The loan aspect will clearly bode well for the banks, and should continue to provide a rebound for revenues through the end of year. As investor confidence trickles back into the market, bank earnings should follow as well. As the banks rebound the key will be the same as it always has, to maximize fee and trading revenue while minimizing cost of funding. Amid the changing landscape accomplishing this will be more challenging, but not impossible.
