With few exceptions, the nation’s big banks posted mixed-to-disappointing fourth-quarter results, and yet even when they missed Wall Street’s greatly tempered expectations, bank stocks as a group continued to shine.
That’s good news for future market gains. The financial sector is the second largest component of the S&P 500 after information technology. With a total market capitalization of $1.67 trillion, the financial sector needs to pull its weight if the broader market is going to continue to climb, notes Jeff Saut, Raymond James’ chief investment strategist, among other market observers.
So it’s certainly bullish that bank stocks are outperforming even as the sector’s news has been so decidedly mixed. The SPDR S&P Bank Index ETF (NYSE:KBE), a proxy for bank performance, is up 10% so far in 2012 versus a 5% rise in the S&P 500. But whether those gains are sustainable beyond the fourth-quarter reporting season still is very much open to debate.
Banks rallied despite JPMorgan Chase‘s (NYSE:JPM) “modestly disappointing quarter,” in the words of CEO Jamie Dimon, and a big profit drop and earnings miss at Citigroup (NYSE:C).
True, Bank of America (NYSE:BAC) posted an in-line profit report, but that was largely due to the sale of its stake in China Construction Bank and lower loan-loss provisions, among other items. Morgan Stanley (NYSE:MS), for its part, reported a deep loss — just not one that was as bad as analysts feared. Goldman Sachs (NYSE:GS), meanwhile, managed to beat Street estimates, but only by drastically slashing costs amid top-line weakness.
Wells Fargo (NYSE:WFC) was the notable bright spot, as profit grew smartly to eclipse analysts’ average estimate — but even there the firm saw revenue slump 4%.
True, on a positive note, capital ratios and credit quality are generally improving. More borrowers are paying their debts on time, lending is picking up and banks’ mortgage businesses are starting to stabilize.
However, revenue growth was sluggish or non-existent, and investment banking results were terrible. A dearth of deal activity hurt fees from advising on mergers and acquisitions. Volatile stock and bond markets meant banks generated less revenue from underwriting stock and bond offerings. The turbulent market and new regulations curbing risk also hurt investment banks’ proprietary trading businesses.
Yes, bank balance sheets are slowly on the mend and fourth-quarter results, while mixed, clearly were better than what the market was anticipating. Resilient share prices are evidence enough of that.
But looking further out, the single biggest worry remains unchanged: Where is future revenue growth going to come from? Asset sales, cost cuts and accounting quirks went a long way toward making the sector’s most recent results look presentable. However, the big banks are hardly back to business as usual — and it’s not clear when, or if, they’ll ever get back there.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.