Banks Tread Water Amid Earnings

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Banks have started reported earnings, and so far the results are in line with what I expected. Although banks may not be thought of as growth investments, their results are important to watch because they can give us key information about the health of the economy. Financial stocks make up 14% of the S&P 500 and are responsible for almost 10% of our GDP. The conditions and profits at banks can have a huge spillover effect on the rest of the market — so we need to keep an eye on them during earnings season.

Of the large banks that have reported so far, results have been right in line with Portfolio Grader’s ratings and expectations. Citigroup (NYSE:C) reported earnings and revenue growth pretty much in line with expectations, primarily as a result of credit improvements. The stock remains a hold in Portfolio Grader. Bank of America (NYSE:BAC) fell short of expectations as revenues declined; that stock also retains a hold rating from Portfolio Grader. Wells Fargo (NYSE:WFC) narrowly exceeded expectations but reported weaker revenues as the mortgage banking business slowed. The stock is also a hold right now. The star of earnings so far is buy-rated Goldman Sachs (NYSE:GS), which handily exceed estimates for revenue and profits — and remains a strong buy.

The vast majority of the banks reporting earnings over the next few weeks receive a “C” grade from Portfolio Grader and are holds if you already own them. Most of what is happening right now in banks is a story of credit improvement rather than actual earnings growth. The asset writedowns and loan-loss reserve increases have slowed (and in some cases disappeared), but ours is still not a robust economy with high loan growth. In addition, new compliance and regulatory costs are also capping earnings for many institutions.

There some exceptions. Some banks are not recovering as fast as others, and analysts are still negative on the stocks. BB&T (NYSE:BBT), Zions Bancorp (NASDAQ:ZION) and SIVB Financial (NASDAQ:SIVB) are among the larger regional banks that have poor earnings momentum and receive a D, or sell, rating from Portfolio Grader. Investors should avoid these stocks until fundamentals show signs of lasting improvement.

Some positive lights shine as well. First Interstate Bancorp (NASDAQ:FIBK) of Montana has exposure to towns experiencing growth due to their proximity to the Bakken shale formation. The bank reported earnings growth of more than 25% last quarter and analysts are expecting another solid performance when the bank reports earnings next week. The stock carries Buy rating from PG and can be purchased in front of the earnings release in expectation of third consecutive positive earnings surprise.

Most banks are not going to show the kind of earnings growth that makes them star performers. But we are seeing steady improvement in the credit situation of most banks — and that bodes well for the long-term health of the U.S. economy.

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