Why U.S. bank stocks are not popping on strong earnings
It’s become what portfolio managers call a “crowded trade.”
Everybody, it seems, likes the U.S. bank stocks. Still trading at below book value in most cases, and with rising interest rates lying tantalizingly in the not-too-distant future, most of the investing pros I speak to on The Street each weekday have positions in the U.S. banks.
But, so far, the market has used the most recent set of quarterly results from the banks as a reason to sell the shares – even when profit and revenue figures have come in ahead of expectations. Here are some of the themes that have emerged so far.
In the third quarter of 2016, traders at the Wall Street banks feasted on the volatility generated in bond markets from the surprise Brexit vote a few months prior. And the U.S. presidential election was barreling to its conclusion, adding to uncertainty. Trading revenue and profit soared across the board. Not this time out. Volatility has eased significantly (geopolitical uncertainty hasn’t disappeared, but markets seem less fazed by it) and that has sent trading revenue plunging at JPMorgan Chase (down 27%), Citigroup (down 16%) and Bank of America (down 22%). The trading desks are sources of huge profit gains when conditions are right, and disappointed investors are now scaling back their expectations.
All of a sudden, credit cards have emerged as a weakness. Both JPMorgan and Citigroup reported higher provisions for credit losses, and said losses in their credit card businesses were the culprit. Analysts say the banks are building their card businesses by issuing more cards to people who will be challenged to pay off the balances. That could mean higher credit card losses ahead.
An improving U.S. economy should translate into a greater appetite for loans among consumers and businesses. And, at JPMorgan and Bank of America, it did just that. Loans rose 7% at JPMorgan and 6% at Bank of America. At Citi, the performance was less robust, with loans rising only 2%.
For the bank bulls, this is the big story. As interest rates rise, they say, the banks will be able to expand their net interest margins, with the expanded margins delivering big gains on the bottom line. JPMorgan and Bank of America pointed to rising rates as a positive in their results.
ONGOING PROBLEMS AT WELLS FARGO
This bank is becoming a category unto itself. Revenue missed expectations for the fourth straight quarter, and mortgage banking income – a key pillar of profit performance at Wells Fargo – fell by a dizzying 37 per cent. Expenses rose by eight per cent, and the bank took a $1 billion charge for litigation related to its fake-accounts scandal. Investors had lots of reasons to sell the stock on Friday, and they did.
IMPLICATIONS FOR CANADA'S BANKS
Expect a weak quarter in the Canadian banks’ capital markets segment, as the reduced volatility that dampened results south of the border should have the same impact here. Watch Toronto-Dominion Bank and Bank of Montreal, where U.S. margins should expand. If TD and BMO have been able to generate loan growth south of the border, their results there should shine.