The market waited eagerly for fourth-quarter and full-year results from financial stocks. Market professionals like to see financials lead the way, as the major banks can signal a healthy stock market as well as a healthy economy.
Many market pros and individual investors alike now are trying to decide what they should do with these stocks.
So let’s look at the recent results for some clues.
Bank of America Corp (BAC)
Adjusted fourth-quarter earnings for Bank of America Corp (NYSE:BAC) came in at 32 cents per share, but with accounting charges of $1.2 billion factored in, earnings per share were 25 cents versus 29 cents in last year’s same quarter. For the full year, EPS was 36 cents, down from 90 cents a year ago.
Credit loss provisions reflected a slower trading business with revenue off by 21% in the quarter. Mortgage banking income was also lower. Expenses were better controlled; however, this didn’t mollify the market.
BAC stock was driven down on the market’s concerns that these problems might be ongoing throughout 2015.
Citigroup Inc (C)
Not only did Citigroup Inc (NYSE:C) fail to meet analyst estimates for the quarter, it also didn’t reach its own targets. Massive legal and restructuring charges of $3.5 billion killed earnings. Citi’s EPS was 6 cents for the quarter, compared to 77 cents a year ago.
Although Citi delivered solid earnings the first three quarters of the year, the market may have taken note that this year’s $3.5 billion charges came on top of $1 billion in charges in the year ago quarter.
The market tends to take a dim view of non-recurring charges that indeed recur.
Total revenues for the fourth quarter were down 1%, and were 14% lower in the trading segment. For the full year, Citi’s income was $7.3 billion on $76.9 billion revenue, compared to $13.7 billion on $76.4 billion revenue.
The market, as with BAC stock, took Citi stock down.
JPMorgan Chase & Co. (JPM)
Of these three major financials, JPMorgan Chase & Co. (NYSE:JPM) furnished the best results. Yet even at that, its fourth-quarter results were lower. Fixed income trading fell by 14%, with total company revenue for the quarter at $23.6 billion, 2% less than a year ago. Net income for the quarter was $4.9 billion, a drop from $5.3 billion last year. After-tax legal charges of $990 million dented fourth-quarter earnings.
For the full year, revenue was $97.9 billion compared to $99.8 billion in 2013, but net income rose to $21.8 billion from $17.9 billion.
The market really didn’t make much distinction on these three big financials, as the stocks were slammed on their earnings news.
Other Big Financials
A couple of other big-name financial stocks also reported earlier, Wells Fargo & Co (NYSE:WFC) and Goldman Sachs Group Inc (NYSE:GS). WFC earned $1.02 per share compared to $1 in last year’s quarter, and could probably be considered the star among the financials for its results. It grew loans, deposits and posted higher revenues.
Wells Fargo is considered more of a consumer and commercial bank, so its business is more mainstream than that of BAC, Citi and JPM, which have heavy capital market exposure. Still, Wells Fargo posted good results even in a poor interest margin environment.
Goldman Sachs, on the other hand, reported fourth-quarter EPS of $4.38 compared to $4.60 in last year’s same quarter, due to lower fixed-income trading results. Segment revenue was $1.2 billion, off by almost 30%.
What the Results Tell
The subpar results for the quarter reflect a couple of things. One is that BAC, Citi and JPM all have an ongoing struggle with legal issues and regulation. These banks reflect the tension inherent in coming to terms with the post-financial crisis world of banking.
There’s not necessarily a one-time fix for that, so the market expressed its concern about these costs as a potential continuing problem.
The serial charges, as we pointed out in the case of Citi, are troubling. BAC also has a history of this. BAC’s management considers this process working through inherited problems, nevertheless the charges seem to just keep coming.
Then there are the financial headwinds even in the mainstream economy. Net interest margins look like they’ll continue to be pressured for the foreseeable future, as the Federal Reserve doesn’t appear to be headed to the rescue any time soon.
The three major financials, BAC stock, C stock and JPM stock, despite their relatively low share prices, don’t look like buys. The headwinds should remain for large financials this year, so watch closely how their managements navigate these.
Investors should avoid these financials until their fundamentals improve.
As of this writing, Greg Sushinsky was long GS.