Can Markets Hold?
Today was earnings day for the biggest mega-banks on the
block — and judging by the market reaction, they failed to inspire investors!
Let’s start with JPMorgan Chase (JPM, Weiss Ratings: B+).
The firm reported earnings of $5.6 billion, or $1.36 a share. That was a big
swing from the year-earlier loss of $380 million, or 17 cents a share. But it
missed the average estimate of $1.38.
One key problem is mounting legal costs — something all
banks are dealing with due to multiple, multinational investigations and
settlements. Those sliced $1 billion, or 26 cents a share, off JPM’s bottom
line.
It’s also facing lackluster capital markets activity, with
revenue from trading bonds, currencies and commodities up just 2 percent.
Profit at JPM’s mortgage banking unit plunged 38 percent. The stock finished
the day down fractionally.
Over at Citigroup (C, Weiss Ratings: B+), profit rose almost
7 percent year-over-year to $3.4 billion, or $1.07 a share. Stripping out
special items resulted in a $1.15 per-share profit, better than the average
estimate of $1.12.
But the global bank said it would exit retail banking and
consumer finance lending in 11 countries around the world — from smaller
Central American nations like Costa Rica and Panama to bigger countries like
Japan and South Korea. Total loans fell 1 percent year-over-year, as did
deposits, showing the growth struggle that mega-banks like Citi face.
All banks are dealing with mounting legal costs.
Credit performance has been a bright spot, with the bank
shrinking its allowance for loan losses to 2.6 percent of loans from 3.16
percent a year earlier. Non-accrual loans (where borrowers are falling behind
on payments) dropped 19 percent.
But if the global economy is faltering, led by Europe, Japan
and other overseas markets, we may have already passed the trough for loan loss
rates. So while C shares gained around 3% on the day, they’ve basically gone
nowhere since all the way back in May 2013.
Then there’s Wells Fargo & Co (WFC, Weiss Ratings: A+),
one of the more domestically focused mega-banks. It reported third-quarter
profit of $5.4 billion, or $1.02 a share. That matched the average forecast of
analysts. Revenue of $21.21 billion slightly beat the consensus estimate of
$20.95 billion.
Mortgage banking is a key element of Wells’ business, and
the news there was disappointing. Mortgage income flatlined at $1.63 billion,
while home loan originations tumbled 40 percent to $48 billion. Auto loans were
a bright spot, up 11 percent to $55.2 billion, as was commercial and industrial
lending, up 12 percent to $212 billion.
But investors weren’t happy overall. The stock plunged
almost a buck and a half on the heaviest volume in a year.
“These earnings reports are coming at a VERY interesting
technical juncture for the financial sector.”
These earnings reports are coming at a VERY interesting
technical juncture for the financial sector. You can see that the banks,
brokers, and insurance stocks — represented by the benchmark Financial Select
Sector SPDR Fund (XLF) in the chart below — have declined along with the rest
of the market recently.
This ETF has already knifed through an uptrend line dating
back to spring 2013, and it is now testing its 200-day moving average. If the latest
earnings news can’t reverse the weakness, and this moving average gives way,
then we could lose yet another key sector of the S&P 500. And that raises
an obvious question: Can the S&P 500 hold if the financials fold?
So what do you think of these developments in the financial
sector? Would you invest in the mega-banks based on what they’re saying about
loan losses, earnings growth, revenue trends, and more? Or are you steering
clear of them?
Are there other, lesser well-known banks you like better than
Chase, Wells, and the like? Or sectors that you’d rather invest in than the
financials? Make sure you stop by the comment section to weigh in on that when
you have a minute!
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