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Big Trouble for Big Bank Stocks

Big banks like JPMorgan can't cut their way to sustained growth

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So, what does all this mean for bank stocks going forward?

The bigger banks have wrung earnings growth over the past few years through these cost-cutting moves (as well as reserve releases, balance sheet adjustments and stock buybacks). The financial sector grew its fourth-quarter earnings by nearly 25% year over year — the biggest gain among S&P 500 sectors. But bear in mind that the revenue comparison for the year is actually negative when compared to 2012.

Simply put, there is very little opportunity for growth in the banking sector right now. The restrictions and costs of legislation like Dodd-Frank have had a negative effect on the larger banks’ earnings potential. Loan demand is still very weak, as the economy is still growing at a very slow pace compared to previous recoveries.

For large-cap bank stocks to grow, they need to show real, sustained revenue growth. They will continue to cut staff … but not in large enough numbers to have the same impact on earnings as the recent past. Loan-loss reserves have been drawn down and regulators are going to be wary about allowing banks to draw down much more to increase earnings.

In fact, I suspect the bigger banks will start to face increased competition from the larger regional banks. Banks like BB&T (BBT) and PNC Financial (PNC) can grow by acquisition in the current environment — not really a strong option for the money center banks. Big bank stocks could be stuck here until the economy allows them to grow revenues — and not just engineer profits.

At the time of publication, Melvin was long WFC.

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