Big Six Bank Earnings Give Financials a Strong Start in 2014

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Financials had a decent start to the fourth-quarter earnings calendar, as big-bank earnings reports went five-for-six.

financialsJPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) all beat Wall Street’s estimates. Citigroup (C) was the lone disappointment, missing analysts’ average forecast by 13 cents per share.

Given that financials are projected to be the biggest contributor to S&P 500 earnings growth this quarter, it’s somewhat of a relief that big-bank earnings reports pulled their weight.

That said, bank earnings reports have been solid, but hardly spectacular. True, 2014 is shaping up to be a much better year for financials, as the economy and housing markets gain steam. But we’re not there yet.

For now, bank earnings reports are showing some of the same old weaknesses, as well as profit gains that are built on costs cuts and the release of reserves rather than any pick up in business.

As we saw with the money-center banks like JPM, WFC, BAC and C, rising interest rates ended the lucrative refinancing frenzy last summer. Higher interest rates have also tamped down demand for mortgages. Housing is expected to be a bright spot for financials going forward, but for now it’s in hangover mode after the rock-bottom rates of early 2013.

Lending at these traditional financials is likewise not growing, and — worst of all for a straight-up investment bank like Goldman Sachs — revenue from trading is in the doldrums. Indeed, at Goldman Sachs, revenue from trading plunged 15% in the fourth quarter and 13% for the full year. At the same time, Citigroup missed Street estimates because of weakness in bond trading.

Yes, there’s a been a pickup in initial public offerings and mergers and acquisitions, but trading — especially in fixed-income, currencies and commodities — has been and remains sleepy, despite equity markets hitting record highs.

Big Financials Hit with Big Legal Costs

Financials are also still dealing with the costs of litigation stemming from the housing market crash. For example, MS stock revealed in its bank earnings report Friday that it set aside another $1.2 billion to handle legal costs related to mortgage-backed securities and the credit crisis.

In some cases — like Bank of America — the monster legal bills and settlements set up easy year-over-year comparisons in the most recent quarter. In other cases — like JPM stock and MS stock — it will help with comparisons this time next year.

The most typical feature of the bank earnings reports this season was that the money center banks made their numbers thanks to cost cuts and improving credit quality. When credit quality gets better, banks are allowed to release reserves — money set aside to cover losses. Yes, that boosts profits, but it’s not a sign of organic growth. In fact, bank earnings reports showed that revenue declined at all of these financials.

The outlook remains bright for financials like MS stock and GS stock because an accelerating economy is supposed to get revenue rising again. Demand for housing and a revival of lending are forecast to boost bottom lines this year. And even if trading remains subdued, banks have slashed costs in those divisions enough to cope until business comes back.

Although big-bank earnings reports show that this part of the financials sector is on the mend, we still have a long way to go to before banks are growing profit with higher revenue, and not just with beneficial accounting rules.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/01/financials-bank-earnings-reports/.

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